Budget 2021 | Government slaps cap on tax-free Provident Fund contribution

Additions over ₹2.5 lakh a year to be taxed.

The Union Budget has proposed taxing the income on provident fund contributions of over ₹2.5 lakh a year, usually made on a voluntary basis by employees.

A similar tax exemption offered to investors in unit-linked insurance products has also been capped to ensure that maturity benefits accruing from premium payments over ₹2.5 lakh a year, will be subjected to capital gains tax.

For contributions upto ₹2.5 lakh a year into Employees’ Provident Fund, tax exemptions will remain along with guaranteed returns, Finance Minister Nirmala Sitharaman said.

“However, some people go to the extent of contributing ₹1 crore each month… what would be his salary? For him to get both tax concession and an assured income, is not comparable with an employee who earns ₹2 lakh and gets 8% return,” the minister said.

“This exemption, without any threshold, benefits only those who can contribute a large amount to these funds as their share,” the Budget documents explained.

This marks the second time the NDA government has sought to tax employees’ provident fund savings. A 2016 Budget announcement to tax 60% of EPF account balances at the time of withdrawal, was later rolled back.

In the case of ULIPs, death benefits will remain exempt from tax irrespective of the premium payment, said Rushabh Gandhi, deputy CEO at IndiaFirst Life Insurance Company.

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