Finance Minister Nirmala Sitharaman raised the limit for tax exemption on interest earned on employee provident fund contributions to Rs 5 lakh per year in defined cases on Tuesday. The new rule will go into effect on April 1st. EPFO (Employees' Provident Fund Organisation) has more than six crore members. Both the employee and the employer contribute 12% of the employee's basic salary and dearness allowance to the EPF. The current interest rate on EPF deposits is 8.50% per annum.
The government has doubled the limit of provident fund (PF) contributions on which interest income will remain non-taxable, providing substantial relief to a large number of middle to high-income earners.
Sitharaman set a limit of Rs 2.5 lakh per year on tax-free interest earned on provident fund contributions by employees and employers combined in her Budget for 2021-22, in an attempt to deter high earners from investing in what is supposed to be the common man's retirement fund.
The minister said the tax-free limit is now being amended to a maximum of Rs 5 lakh per year, in response to a debate on the Finance Bill 2021 in Lok Sabha.
This exemption, however, is subject to the condition that the contribution of up to Rs 5 lakh does not include employer contributions in excess of the statutory limit of up to 12% of basic pay.
This would apply to situations in which employers do not contribute to a retirement fund.
The Rs 2.5 lakh limit applies to 92-93% of subscribers, and they are eligible for tax-free assured interest under this scheme.