The government has raised the threshold limit of tax-exempt contributions to the Provident Fund (PF) to Rs 5 lakh (from Rs 2.5 lakh announced in Budget 2021), subject to certain conditions. This increased tax-exempt limit is applicable to only those PF contributions where there is no employer contribution. This announcement was part of the amendments made to the Finance Bill, 2021 at the time of passing of the Bill in the Lok Sabha on March 23.
According to tax experts that ET Online spoke with, this limit will be applicable only in certain specified conditions and will not benefit private-sector employees. This is because as per the Employees’ Provident Fund and Miscellaneous Act, 1952, it is mandatory for the employer to make matching contributions (currently 12%) to the EPF account along with the employees’ own contribution, i.e., 12%. Thus, individuals working in the private sector can contribute a maximum of Rs 2.5 lakh in a financial year in EPF and VPF to avail tax-exempt interest as announced in the Budget 2021 effective from April 1, 2021.
In the case of government employees, there is such a fund called General Provident Fund where the government does not contribute. Rather, the government’s contribution goes to the pension fund of the employees. As there is no contribution by the employer (i.e., the government), employees of the government sector can contribute a maximum of Rs 5 lakh into their PF accounts in a financial year to earn tax-exempt interest.
“The enhanced limit of Rs 5 lakh shall have an impact on government employees contributing towards the General Provident Fund. However, the limit for private-sector employees shall continue to be Rs 2.5 lakh as the employer needs to contribute towards Employee Provident Fund,” said Amarpal Chadha, Partner, People Advisory Services, EY India.
In the case of private-sector employees, the EPF scheme rules are governed by the Employees’ Provident Fund Act, 1952. As mentioned above, as per the Act, an employer is mandatorily required to make a matching contribution to the employees’ provident fund account along with employees’ own contribution. Without the employer’s contribution, an employee cannot contribute to his/her own EPF account. Thus, for private-sector employees,’ the maximum contribution they can make in a financial year to continue to earn tax-exempt interest will be Rs 2.5 lakh (EPF + VPF) in a financial year.
Aarti Raote, Partner, Deloitte India says, “In the Budget 2021, the Finance Minister had sought to tax interest earned on employee contributions in excess of Rs 2.5 lakh. While announcing the amendments to the finance bill on March 23, 2021, the finance minister has increased this threshold of Rs 2.5 lakh to Rs 5 lakh in cases where no contribution is made by the employer to the fund. The private sector employees would not be impacted by this change as the provisions of Provident Fund Act which apply to the private sector, the employer as well as the employee both contribute to the fund. This change would benefit government employees where now the threshold of Rs 5 lakh would apply.”