Article originally published in Gujarati Mid-day newspaper on April 27, 2021. Here is the English transcript of the same.
‘The hardest thing to understand in the world is the Income Tax’
– Albert Einstien
However, we shall make it simple for you to understand taxes and help you to utilistise the tax provisions to your best advantage.
As we all know, the Employee Provident Fund (EPF) is a retirement benefits scheme in which employees of an organisation contribute a specified percentage of their basic monthly income. In the same lines, the employer also contributes a similar amount on their behalf towards the scheme. Salary being defined for the purpose of EPF as ‘basic wages plus dearness allowance plus retaining allowance’. The maximum contribution to EPF has been capped at 12% of Salary by the Employee and Employer respectively. The employee can voluntarily pay higher contribution above the statutory rate of 12%. This is called contribution towards Voluntary Provident Fund (VPF) which is accounted for separately. This VPF also earns tax-free interest. However, the employer does not have to match such voluntary contribution. EPF and VPF contribution is a popular investment option under section 80C of the Income Tax Act.
Under the erstwhile Income Tax laws, interest on Provident Funds i.e. EPF and VPF both was always exempt. The proposed changes in Budget 2021 bring under the taxation gamut income from investments in provident funds, relatable to investments exceeding Rs 2.5 lakh a year w.e.f April 01, 2021. The existing PF balance and interest earned thereon will remain tax free.
This means that if an employee contributes more than Rs 2.5 lakhs per annum or amount equivalent to Rs 20,833 per month in the provident funds (including voluntary contributions i.e EPF + VPF) the interest on such investments exceeding 2.5 lakhs is taxable. Interest on the contributions by employer remains exempt in any case.
To explain by way of example, lets assume, your salary income is Rs 1,50,000 per month divided into 2 components Basic : 1,00,000 and HRA : 50,000. Then your contribution is Rs 12,000 per month i.e. Rs 1,44,000 per annum. Hence you will not be impacted by this change of tax laws. However, if you decide to voluntarily contribute Rs 1,50,000 for this financial year then your total contribution to provident fund will be Rs 2,94,000 (EPF Rs 1,44,000 and VPF Rs 1,50,000). Hence, the interest earned on amount invested in excess of Rs 2,50,000 i.e. interest on Rs 44,000 will be taxable.
In specified cases, the above limit of Rs 2.5 lakh per annum has been raised to Rs 5 lakh per annum by amending the finance bill 2021. This increased limit is applicable where the Rs 5 lakh contribution pertains to the Employee only and the Employer does not contribute. In the private sector there are hardly any chances of Provident Fund Contribution by the Employer being zero and hence the benefit of the above increased limit is generally available to Employees in the Government sector contributing to the fund called General Provident Fund where the government does not contribute.
Question :
1) I am employed in private sector. My total contribution to PF including VPF from April 01, 2020 to March 31, 2021 was Rs 3,60,000. Keeping above amendments in mind can I still contribute the same amount?
Answer : Yes, you can contribute the same amount through VPF in financial year 2021-22 also. The amendments in finance bill 2021 only changes the taxation of the contributions to EPF. The interest earned on contribution above Rs 2,50,000 will be taxable and hence you will have to pay tax on interest earned on contribution of Rs 1,10,000.
2) I am a Government Employee and contributing Rs 45,000 per month from my salary to my General Provident Fund (GPF) Account. Will I have to pay tax on the interest earned on my GPF investments?
Answer : The Government typically does not contribute to GPF Account and hence, this case will be covered by the amendment to the Finance Bill 2021. Accordingly, interest earned on the investments in GPF upto Rs 5 lakhs per annum will be exempt. Your contribution to GPF is Rs 5,40,000 hence interest earned on the contribution of Rs 40,000 will be taxable.