In order to rationalize tax exemption for the income earned by high-income employees, the Union Finance Minister Nirmala Sitharaman while presenting Budget 2021, proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of Rs 2.5 lakh.

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"This restriction shall be applicable only for the contribution made on or after April 1, 2021," FM said.

In simple words, this means that the interest earned on the annual provident contribution above Rs 2.5 lakh will be taxable.

According to experts, Rs 2.5 lakh annual threshold means that a person contributing up to Rs 20,833 a month to PF (basic salary of up to Rs 1.73 lakh a month) will escape the tax.

"As paying tax-free interest on PF becomes more and more unsustainable, the government wants to curb high-income earners from self contributing more to their PF accounts (employer contribution was capped last year at Rs 7.5 lakh NPS + PF + Superannuation). Interest accumulation in employee PF in excess of Rs 2.5 lakh annually to now be taxed, however, the method of calculation will be specified later. A large tax-free interest accrual which is not taxed on withdrawal either is now being rationalized and will mostly impact the high-income bracket," said Archit Gupta, Founder and CEO, ClearTax.

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First Published:Feb 1, 2021 3:31 PM IST