Union Budget 2021-2022: The government may boost the limit for tax-free contributions in Provident Fund (PF) for all salaried employees to the same level as that for government employees, a maximum of Rs 5 lakh per year, according to two people familiar with the situation.
Finance Minister Announced Capping of Tax-Free PF Contribution
As per the two, the finance minister announced capping tax-free annual Provident Fund contributions to Rs 2.5 lakh to avail tax-free interest income in the Union Budget 2021-22, but later raised this limit to Rs 5 lakhs for such funds where employers do not contribute, a move that benefited only government employees. "Several requests have been received in various ministries and departments to make this provision equitable and non-discriminatory, as well as to increase the limit, as this is one of the most successful social security measures." One of the two added, "It is being considered."
Finance Minister Nirmala Sitharaman said the Lok Sabha on March 23, 2021, after declaring the limit in the budget last year. "I want to address the matter of income tax levied on a contribution of 2.5 lakh in the PF, the majority of people are covered by the 2.5 lakh limit. This change has no effect on small and medium taxpayers. Where there is no employer contribution, I aim to raise the cap to $5 lakh."
For Government Employees, Cap for Tax Free Interest Income Is Rs 5 Lakhs
Tax professionals and PF experts, on the other hand, say that raising the threshold limit from Rs 2.5 lakh to Rs 5 lakh exclusively benefits government employees, which is unfair. “Following Budget 2021, the government proposed a further change, doubling the contribution threshold limit for tax-free interest income from Rs 2.5 lakh to Rs 5 lakh if the PF contribution is made to a fund where the employer does not contribute. As a result, the government has offered relief for contributions made to the General Provident Fund (GPF), which is a benefit available solely to government employees and for which the employer does not contribute.
As a result, the government has offered relief for contributions made to the General Provident Fund (GPF), which is a benefit available solely to government employees and for which the employer does not contribute. As a result, the tax-free interest income maximum for government employees is set at 5 lakhs," said Archit Gupta, founder and CEO of tax consultancy firm Clear.
New Regime Provides for Grandfathering of Earlier Contributions
"For all practical purposes, particularly for private sector employees, both employee and employer contributions are part of the agreed wage, which is called cost-to-company (CTC),". The contribution of the employer is always included in this CTC. As a result, there is a case to be considered, said the second person cited above.
According to tax experts, the new regime allows for grandfathering of previous contributions. "This change will take effect on April 1, 2021, for contributions made on or after that date. The amendment will not affect any previous contributions or interest”, according to Anita Basrur, partner, direct tax at Sudit K. Parekh & Co. LLP, a tax and audit business.
"The $250,000 limit only applies to employee contributions made in the prior year. In the hands of the employee, only the interest earned on the excess share is taxed. "On this component only, the tax impact would persist for y-o-y interest accruals," said Aarti Raote, partner at Deloitte India.
