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The amendment proposed by Finance Minister Nirmala Sitharaman to the Budget provision related to capping of employee provident fund contribution for tax exemption is only meant for the subscribers of General Provident Fund/Statutory Provident Fund.
Tax exemption
In order to rationalise tax exemption for the income earned by high-income employees, it was proposed in the Budget to cap tax exemption to the annual contribution of ₹2.5 lakh on the interest earned. This restriction, it was proposed, will be applicable only for the contribution made on or after April 1.
“This amount is now being raised to ₹5 lakh only in those cases where there is no contribution by the employer in that fund,” the FM had said while explaining that in most cases there is contribution from the employee and employer. But in cases where there is only contribution from by the employee without any contribution from the employer, that amount is raised to ₹5 lakh, she said. “While there is no change in provisions for normal EPFO subscriber, when we talk about a fund where both employer and employee are at least contributing 12 per cent each of basic plus DA and contribution for tax-free interest is capped at ₹2.5 lakh, effectively it could be ₹5 lakh if we consider contributions from both employer and employee,” explained an official from the Finance Ministry.
Accumulated balances
Neha Malhotra, Director at Nangia Andersen, said that the prevailing provisions of the Income Tax Act grant an exemption in respect of any payment from specified provident funds. Additionally, accumulated balances due and payable to an employee by specified provident funds are also exempt, subject to certain conditions. Now, amendment has been proposed in the Act.
“The amendment shall impact only government-sector employees, who contribute to the Statutory Provident Fund/ General Provident Fund. Consequently, while private sector employees earning interest on Provident Fund on annual contribution exceeding ₹2.5 lakh would be required to pay tax on interest accruing on such excess contribution, for government employees, the monetary ceiling shall be ₹5 lakh,” she said.
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