New rule for Taxation contribution to EPF

by mehekkaoberoi


  • The Employee Provident Fund (EPF) is a retirement benefits scheme in which employees of an organization contribute a small portion of their basic pay monthly. In the same line, the employer also contributes a similar amount on their behalf towards the scheme.
  • According to existing legislation, if a person’s monthly wage does not exceed Rs. 15,000, he or she is required to join the EPF.
  • In February 2021, the Budget suggested that interest income on Provident Fund (PF) contributions over Rs 2.5 lakh in a year will not be tax exempt. The government filed an amendment to the Finance Bill, 2021, proposing to increase the contribution cap for tax-exempt interest.
  • With this, the government granted assistance for contributions paid to the General Provident Fund, which is solely available to government employees and for which the employer makes no contribution.


  • The government has discovered cases where some employees are donating large sums to these funds and are receiving tax benefits at all phases.
  • The government has thus proposed imposing a threshold limit for tax exemption in order to restrict Significant Net Worth Individuals (HNIs) from the advantage of high tax-free interest income on their large contributions.
  • EPFO is working to bring all eligible workers in the country within the EPF & MP Act, 1952, and to bring them under the umbrella of the Act’s Schemes.
  • The Ministry of Labour and Employment has introduced the Pradhan Mantri Shram Yogi Maan-dhan Yojana, which is a voluntary and contributory pension system that provides a monthly minimum assured income of Rs. 3,000 to people who reach the age of 60.
  • The scheme is open to unorganized workers between the ages of 18 and 40 who have a monthly income of Rs.15, 000 or less and are not members of EPFO, ESIC, or NPS. The beneficiary pays 50% of the monthly contribution, and the Central Government matches it with an equal monthly contribution.

Сurrent  Sсenаriо:-

  • The guidelines for taxing interest income on contributions to the Employees’ Provident Fund were recently announced by the Finance Ministry.
  • Interest income earned on EPF contributions above Rs. 2.5 lakh (for private sector employees) and Rs. 5 lakh (for government employees) would be taxed.
  • In Financial Year 2021-22, the government will tax interest on contributions made in excess of these restrictions, with separate accounts for taxable and non-taxable contributions to be kept inside the provident fund account in FY 2021-22 and following years.
  • A fiscal year (FY), often known as a budget year, is a time period used by the government and corporations to prepare annual financial accounts and reports for accounting purposes.
  • The Central Board of Direct Taxes (CBDT) has added a rule in which states that non-exempt income from interest accrued during the previous year is computed as interest accumulated in the taxable contribution account during the previous year.
  • The interest income on the additional contribution (above Rs 2.5 lakh for private employees and Rs 5 lakh for government employees) for a year would be taxed every year, according to the notification.
  • This indicates that if a person contributes Rs 10 lakh to a PF each year in FY 2021-22, the interest income on Rs 7.5 lakh will be taxed not only in FY 2021-22, but also in subsequent years.


  • In the face of low bond rates this year, the stock market surge is likely to maintain a high interest rate.
  • For FY21, the EPFO has suggested an interest rate of 8.5 percent. EPFO spent a total of 32,377 crore in FY20, 27,743 crore in FY19, and 19,796 crore in FY18.
  • The organization has decided to invest 15% of its incremental flows (new contributions) in equities Exchange Traded Funds (ETFs).
  • The Sensex, Nifty, CPSE Index, and Bharat 22 Index are all indexed to ETFs, according to the response. However, during the last few years, the latter two indices that focus on Public Sector Undertaking equities have lagged larger benchmarks.
  • The Finance Ministry plans to invest a tiny amount of the EPF fund in stocks. Several options were addressed at the CBT meeting. One suggestion was to invest 1% of the EPF fund, which is believed to be worth Rs 8, 25,000 crore, in stocks. This will result in a stock market inflow of Rs 8,250 crore.
  • Labor unions, on the other hand, are adamantly opposed to EPF funds being invested in the stock market. Employees’ EPF is their hard-earned money. Employees’ life savings, they believe, should not be vulnerable to the changes of a market that can rise sharply one year and then fall off a cliff the next.

Curated by-Meghna.Manoj

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