In the light of the new rules on taxation of provident funds in the Budget 2021, what is the implication for PF holders?

It may be recollected that in the Union Budget 2021, the finance minister, Nirmala Sitharaman had specifically made changes in PF interest eligibility for tax rebates. She had announced that provident fund holders investing more than a sum of Rs.2.50 lakh in their PF accounts annually will not earn the mandated 8.5% tax-free from April 2021. In other words, the interest will be earned but now the interest will be fully taxable.

In such cases the entire interest earned will be treated as other income and taxed at the incremental tax rate applicable to the individual. This only applies to the employee contribution to PF and not to the employer contribution of the PF. Effectively, if you are in the higher income bracket then the tax-free status of interest will not be applicable to you especially if you are contributing more than Rs.250,000 per year into your employee PF.

The purpose of imposing this tax was because the government found huge contributions made by a handful of individuals into their PF accounts. Some of them have been clearly trying to take advantage of the 8.5% tax-free earnings defeating the entire purpose of the government in the process. For example, deposits amounts in excess of Rs.100 crore in their PF accounts were deposited. Top 20 HNIs have Rs.825 crore parked in PF accounts.