InvestorQ : Can you tell me what are the restrictions on the Provident Fund tax breaks imposed by the Union Budget?
shrinidhi Rajan made post

Can you tell me what are the restrictions on the Provident Fund tax breaks imposed by the Union Budget?

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4 weeks ago
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There are some very interesting shifts in the way tax benefits would be available in the case of provident fund contributions. Here are a few highlights.

· In a rather far-reaching move, the budget announced that those who contribute more than Rs.2.50 lakhs per year to provident fund will not be eligible for tax exemption.

· This only applies to the interest component and the Section 80C exemption on contribution to PF will still continue as before.

· Also, this will only apply to the employee contribution portion of PF and not to the employer contribution to PF.|

· Provident funds pay between 8% and 8.5% interest and that is nearly 250-300 bps more than what banks pay on the FDs. In addition, government loses tax revenues.

· This will be a positive step for the debt markets to the extent that the distortion of post-tax yields will not happen anymore.

· Government has shown with data that only 1% of Indian population contributes more than this threshold and hence the overall impact would be limited.

· This can be seen as a precursor to other small savings offering this tax plus returns arbitrage gradually also seeing reduced benefits. 

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