Changes in the Tax Rules for Provident Fund Contributions

Are you an Employee contributing to the Employee Provident Fund (EPF) or General Provident Fund (GPF)? Then you must know the recent changes in the Tax Rules which are applicable from 1st April 2021.

Good news

First – For now, there is no change in the tax rules concerning Public Provident Fund (PPF). So, those who are contributing up to Rs.1,50,000 per year per person can continue to enjoy tax exemption on investments, interest earnings, and withdrawals.

Secondly – The contributions to Employees Provident Fund (EPF) up to 31st March 2021 are exempt from taxes.  To illustrate –

  • The Balance in the EPF Account as of 31 March 2021 is exempt from tax.
  • Whatever interest is earned on this amount from 1 April 2021 and onwards, will continue to be tax-exempt.

Bad (Tax) News

Employee Contribution in excess of Rs.2,50,000 per year will be treated as a taxable contribution and therefore, interest earned on the excess amount is taxable. (Note: In case there is no employer contribution, then the threshold limit will be Rs.5,00,000 per year)

To illustrate, Mr. Sunkappa is an employee at Info Systech Limited.

  • He has an EPF account with a balance of Rs.20,00,000 as of 31st March 2021.
  • He is earning Rs.1,40,000 as interest between April 2021 and March 2022 (FY 2021-22) on the above amount.
  • He contributes Rs.30,000 to the EPF account every month, Rs.3,60,000 per year.
  • His employer contributes Rs.1800 per month as their contribution (Rs.21,600 per year)
Sunkappa’s EPF AccountNon-Taxable (Exempt) Rs.Taxable Contribution Rs.
PF Part APF Part B
Balance as on 31st Mar 2120,00,0000
Interest on the above balance1,40,0000
Employer contribution in FY 2021-2221,6000
Employee Contribution in FY 2021-22 (Rs.3,60,000)

Interest earned on this amount

2,50,000

17,500

1,10,000

7,700 (taxable)

To give further clarity – Is Rs.1,10,000 taxable in the above case?

No. In the above case, Rs.1,10,000 is not taxable. Only the interest Rs.7700 earned on the above amount is taxable.

However, there is another provision wherein if

  • The employer contributes above 12% of salary; or
  • The employer contribution to PF, National Pension Scheme (NPS), Superannuation Fund in the aggregate exceeds Rs.7,50,000 per year;

Then the excess contribution will be taxable as perquisite in the hands of the employee.

Your queries – Some employees asked me whether it is good to stop Voluntary Contribution (VPF) to Provident fund account in the changed tax scenario. The answer is if the Employee Contribution per year is in excess of Rs.2,50,000 per year, it may be a good idea to limit the contribution to Rs.2,50,000.

However, interest on EPF is much higher than the Fixed Deposit Rates in Banks. So, if you are going to park the excess amount in Bank FD, then even after considering a tax on the interest, a voluntary contribution to EPF is still financially viable.

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at [email protected]

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