RATIONALISATION OF TAX FREE INCOME ON PROVIDENT FUND
In order to rationalize tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest earned on the employees contribution to various provident fund to the annual contribution of Rs. 2.5 lakh. This restriction shall be applicable only for the contribution made on or after 01.04.2021.
Government intention is to focus on high income employees.
To give effect to this proposal the following proviso added in to Section 10 clause 12.
In clause (12), the following proviso shall be inserted, namely:––
“Provided that the provisions of this clause shall not apply to the income by way of interest accrued during the previous year in the account of a person to the extent it relates to the amount or the aggregate of amounts of contribution made by that person exceeding two lakh and fifty thousand rupees in any previous year in that fund, on or after the 1st day of April, 2021 and computed in such manner as may be prescribed.
We can understand this by example:
Employee contribution in PF- Rs. 4,00,000
Rate of interest @ 8%
So interest earned-32,000
Now excess contribution towards PF 4,00,000-2,50,000=1,50,000.
Interest earned on 1,50,000=12,000
Taxable Interest-12,000.
