New tax-free ceiling on PF for employees in firms without employer contribution

Finance Minister, Nirmala Sitharaman

The government has put yet another ceiling on tax-free contribution made to provident funds. Replying to the debate on Budget 2021-22, Finance Minister Nirmala Sitharaman said that a ceiling of Rs 5 lakh per annum would be applied in those cases where there is no contribution towards provident fund (PF) by the employer.

Presenting the Budget 2021-22, Finance Minister Nirmala Sitharaman had earlier proposed to restrict tax exemption for the interest income earned on the employees' contribution to various provident funds to the annual contribution of Rs 2.5 lakh. This restriction was made applicable for the contribution made on or after April 1, 2021. The changes were done to rationalise tax exemption for the income earned by high income employees.

The finance minister on Tuesday said that the earlier ceiling announced in the budget has now been raised to Rs 5 lakh in those case where there is no PF contribution made by the employer. There are numerous entities that follow this system of contribution, she said.

The new changes would prevent individuals from putting higher amounts of money in PF to get assured returns and tax-free status. All contributions above the ceiling would be taxed at applicable income tax rates.

The Centre had earlier put restrictions on tax-free interest earnings on employees' contribution to various provident funds in the budget after a scrutiny of accounts revealed that certain high net worth individuals (HNIs) were using the saving scheme to pump money running into hundreds of crores to escape paying taxes and get assured returns.

Sources in the department of revenue said the scrutiny of accounts brought out interesting facts about certain HNIs where one of the highest contributors has more than Rs. 103 crore in his provident fund account followed by two second highest ones having more than Rs 86 crore each. The top 20 HNI whose records were seen had about Rs 825 crore in their accounts while top 100 HNI contributors have more than Rs 2,000 crore.

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