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Budget proposes tax on EPF interest

Topics Covered: Government Budgeting.

Budget proposes tax on EPF interest:


Context:

In the Union Budget 2021, Finance Minister announced a decision to tax interest incomes on annual Employees’ Provident Fund (EPF) and Voluntary Provident Fund (VPF) contributions of over Rs 2.5 lakh.

Implications:

  • The interest income earned by an individual will be taxed at current income tax rates if the contribution exceeds Rs 2.5 lakh per annum; the same rule applies to VPF contributions.
  • This will only be applicable to the employee’s share of provident fund and not the employers.

Impact:

The move will impact high-income earners or high net-worth individuals (HNIs) who make large voluntary contributions to provident fund annually.

Need for:

So far, many people put huge sums of money annually towards EPF and earned interest income from it without having to pay any tax. An anomaly is created due to this. The latest move will help restore equality and discourage HNIs from making high annual contributions towards provident fund.

What is EPF?

It is mandatory for any company with 20+ employees to comply with the EPF schemes of the government. As per this scheme, the employer, as well as the employee, are required to contribute some part of the monthly salary of the employee (generally 12%) into the EPF investment account.

What is VPF?

As the name suggests, it is a voluntary scheme which allows employees to voluntarily contribute to their PF account after contributing 12% as per the EPF guideline. The interest rate with VPF is similar to EPF and employees can contribute up to 100% of their salary.

Key features:

Applicability: Only salaried working professionals can open EPF and VPF.

Contribution: For EPF, the minimum contribution for employee and employer is 12 per cent of the basic pay + dearness allowance of the employee. With VPF, an employee can contribute any amount up to 100% of their salary + dearness allowance.

InstaLinks:

Prelims Link:

  1. What is EPF?
  2. What is VPF?
  3. Key features.
  4. What is EPFO?

Mains Link:

Discuss the significance of EPF Scheme.

Sources: the Hindu.