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Provident fund contribution limit raised to Rs 5 lakh for tax-free interest: What it means for you

The government has raised the limit for tax exemption on interest earned on provident fund contribution by employees to Rs 5 lakh per annum. Here is all you need to know about the move:

March 24, 2021 UPDATED: March 24, 2021 16:19 IST

The government has raised the limit for tax exemption on interest earned on provident fund (PF) contribution by employees to Rs 5 lakh per annum in specified cases, compared to Rs 2.5 lakh proposed in the Union Budget.

It may be noted that in the Budget 2021-22, Finance Minister Nirmala Sitharaman had capped the tax-free interest earned on provident fund contribution by employees and employers together to a maximum amount of Rs 2.5 lakh in a year.

The move was proposed to discourage high net worth individuals (HNIs) and high-income earners from parking their surplus wealth in the provident fund, which is supposed to be a common man’s retirement fund.

However, Sitharaman said the tax-free limit is now being amended to a maximum of Rs 5 lakh per annum. She announced the same while replying to a discussion on the Finance Bill 2021 in the Lok Sabha.

What does it mean?

This means that an employee will now be able to contribute Rs 5 lakh towards provident fund on an annual basis and get tax-exempt interest income on it.

However, this exemption is subject to the condition that the Rs 5 lakh contribution does not include the employer’s contribution beyond the statutory limit of up to 12 per cent of basic pay.

“I intend to raise this limit to Rs 5 lakh only in those cases, where there is no contribution by the employer in that fund,” Sitharaman said.

“So, most often, it is employee contribution and employer’s contribution, but there are contributions which are the only employee and no employer contribution is made, in such cases that amount is raised to Rs 5 lakh,” the finance minister added said.

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The new provision would come into effect from April 1.

Who benefits?

The increased EPF contribution limit will benefit middle- and high-income earners in the country. Employees who contribute Rs 5 lakh annually i.e. Rs 41,667 monthly into PF account will get the benefit of tax-free interest income on their deposits.

However, if the PF contribution exceeds Rs 5 lakh annually, then the interest income on the additional PF contribution — the remaining amount after deducting Rs 5 lakh — will be taxed.

Sourcehttps://www.indiatoday.in/business/story/provident-fund-contribution-limit-raised-to-rs-5-lakh-for-tax-free-interest-what-it-means-for-you-1783147-2021-03-24

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