Interest on PF will now be tax-free up to Rs 5 lakh if employer doesn't contribute

This decision replaces the Rs 2.5 lakh limit proposed in the Union Budget.

The Narendra Modi government has enhanced the limit for tax exemption on interest earned on employees' provident fund contribution to Rs 5 lakh per annum in specified cases.

This decision replaces the Rs 2.5 lakh limit proposed in the Budget.

The new provision comes into effect from April 1.

Replying to a discussion on the Finance Bill 2021 in Lok Sabha, the minister said that the exemption, however, is subject to the condition that up to Rs 5 lakh contribution does not include the employer's contribution beyond the statutory limit of up to 12 per cent of the basic pay.

Nirmala said, "Most often, it is employee contribution and employer's contribution, but there are contributions which are the only employee, and no employer contribution is made. In such cases, that amount is raised to Rs 5 lakh."

The government objective behind taxing PF interests is to ensure that high-income earners do not self-contribute more to their PF accounts.

As per rules, at least 12 per cent of an employee's basic salary and performance wages is compulsorily deducted as provident fund, while the employer contributes another 12 per cent. And if an individual earns over Rs 20.83 lakh per annum, they will attract interest on EPF contribution being taxed.