Finance Minister Nirmala Sitharaman announced some direct tax proposals in her Budget 2021 speech, including taxing interest earned by provident fund contributions above Rs 2.5 lakh a year at normal rates. This will only apply to the employee's contribution and not that of the employer.
"In order to rationalise tax exemption for the income earned by high income employees, it is 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 shall be applicable only for the contribution made on or after 01.04.2021," said the Finance Minister.
This will impact high-income salaried people using voluntary provident fund for tax-free interest. Individuals who contribute over Rs 20,833 a month to PF will be taxed.
The government had made a similar proposal in Budget 2016 wherein the interest accrued on 60 per cent of EPF was to be taxed. The proposal was subsequently recalled after a massive outcry. However, the proposal only impacts high-salaried employees and might not receive such a backlash.
Additionally, the government stated that any delay in deposit of contribution of employees by employers towards welfare funds will not be allowed. "Delay in deposit of the contribution of employees towards various welfare funds by employers result in permanent loss of interest/income for the employees. In order to ensure timely deposit of employees' contribution to these funds by the employers, it is proposed to reiterate that the late deposit of employees' contribution by the employer shall never be allowed as deduction to the employer," said the Finance Minister.
The government also proposed to "rationalise provisions relating to taxation of the assets or amount received by partners from the partnership firm in excess of their capital contribution".