Enhanced PF Limit For Govt Sector Employees
Under the existing provisions of the Income-tax Act, interest on the contribution made by the employees to the statutory provident fund recognised provident fund and the public provident fund is exempt from tax. The Finance Bill 2021 proposed to withdraw the said exemption available for the interest income accrued during the previous year to the extent it relates to the contribution made by the employees over INR 0.25 million in the previous year (effective assessment year 2022-23).
It is worthwhile to note that a significant amount of contribution (both employee and employer part) goes to statutory provident funds every year. Hence, the Government introduced this amendment to curb the practice of earning tax-free interest accrued on such contributions.
Also, the Finance Bill as passed by Lok Sabha on March 23, 2021, has further amended the above proposal to provide that if an employee is contributing to the fund but there is no matching contribution to such fund by the employer, then the interest income accrued during the previous year shall be taxable to the extent it relates to the contribution made by the employee to that fund in excess of INR 0.5 million in a financial year. Thereby, increasing the limit on taxation of interest. The same would majorly impact the employees from the Government sector as in the case of private-sector employees, both employee and employer are required to make a contribution at 12% of basic pay or INR 15,000 (as may be applicable).
The said interest income will become part of the total taxable income of the taxpayer and shall be taxable under the head ‘Income from other sources as a residuary income. No special rates are defined for the taxability of this interest and hence, such income shall be taxed at the prevailing income tax rates in the prescribed manner.