Modified Tax Provision on PF Income

April 08, 2021

The Finance Minister, Nirmala Sitharaman, steered through Parliament the Finance Bill of 2021, which included 127 amendments. Among the major changes was a tweak in the proposal to tax income on PF contributions over Rs 2.5 lakh a year. She said that nearly 93% PF account holders will be covered by the Rs 2.5 lakh per year limit, while a mere 1% were abusing the system. However, she introduced an amendment doubling the threshold for annual PF contributions to Rs 5 lakh, only for employees whose employers do not remit any contribution to their retirement fund account.

HRPI View: As an employer-employee relationship is an implicit requirement to open an EPF account, and since a ’zero employer contribution’’ scenario is not possible for EPF members, this amendment affects only government employees. The new Wages Code will also compel employers to pay higher EPF contributions by linking them to at least half of their total pay on a cost to company basis, rather than 24% of basic pay presently. This will virtually force many EPF members into contributing over Rs 2.5 lakh a year. Greater clarity will emerge once the rules regarding implementation of this new tax are released.