Wednesday, March 24, 2021

PF donation cap for tax-free income doubled


In a significant relief to high amount of mid - to high tech earners, the government has dropped the limitation of provident fund (PF) donation on which interest earnings will stay non-taxable. In Budget FY22, the Finance Minister proposed to tax interest on own participation of workers exceeding Rs 2.5 lakh annually, the authorities in its own amendments to the Finance Bill, 2021 suggested to increase the limit to Rs 5 lakh. This is applicable for all donations starting April 1, 2021.

"Provided further that in the event the participation by such individual is in a fund where there is not any participation by the company of such individual, the terms and conditions of the first proviso will have the effect as if for the words'2 lakh and fifty thousand rupees', the words'five lakh rupees' were substituted," the change to the Finance Bill, 2021 read.

From the Budget proposal a month, the federal government had suggested,"to confine tax exemption to the interest income earned to the workers' contribution to different provident fund into the yearly donation of Rs 2.5 lakh."

Who gains?

The choice to raise the cap on EPF contributions which may have tax-exempt interest earnings, from 2.5 lakh to 5 lakh per annum, will guarantee that people earning annual basic salary up to Rs 41.66 lakh or overall salary of about Rs 83 lakh (if fundamental is 50 percent of CTC) are covered below it.

What this usually means that if someone's own contribution to the workers' provident fund per month is left up to Rs 41,666 (Rs 5 lakh per year), there'll be no tax on the interest . But if the donation exceeds this, then interest on further contribution is going to be taxed. It follows that people having monthly basic salary of over Rs 3,47,216 will currently get affected by the transfer as their yearly EPF contributions (in the rate of 12 percent of basic salary) will exceed Rs 5 lakh.

Consequently, if somebody contributes Rs 12 lakh per calendar year, the tax will be related to interest on Rs 7 lakh (Rs 12 lakh -Rs 5 lakh). While the interest earnings on Rs 7 lakh would amount to Rs 59,500 (in EPF interest rate of 8.5 percent ), the tax payable the exact same will be Rs 18,450 (at marginal tax rate of 30 percent ).

Justifying its movement in February, the authorities said that it had discovered cases where some workers were contributing substantial amounts to those funds and receiving the advantage of tax advantage. With a goal to exclude HNIs in the advantage of large tax-free income on their big contributions, the authorities proposed to impose a threshold limit of participation in Rs 2.5 lakh for tax exemption. It's , however, been increased to Rs 5 lakh.

On the go, Finance Minister Nirmala Sitharaman, a month, stated "This fund is really for the sake of the employees, and employees aren't likely to be influenced by's just for large ticket money that comes into it since it's tax advantages and (is) guaranteed about 8 percent yield. You find substantial quantities, some to the extent of Rs 1 crore also being placed to this every month. For someone who places Rs 1 crore to this fund every month, what ought to be his wages. So, for him to provide both taxation concessions and additionally a confident 8 percent yield, we believed this is most likely not comparable with a worker with about Rs two lakh."


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