Higher tax-free investment bar in PF to benefit HNIs

In the Budget presented to Parliament on February 1, Finance Minister Nirmala Sitharaman had said that interest on employee contributions to provident fund (PF) over Rs.2.5 lakh per annum would be taxed from April 01

Mumbai: Pension fund (PF) managers have hailed the government's decision to increase the tax-free investment limit in PF to Rs 5 lakh if employers don't contribute. Prior to it, in her Budget presented to Parliament on February 1, 2021, Union Finance Minister Nirmala Sitharaman had said that interest on employee contributions to provident fund (PF) over Rs 2.5 lakh per annum would be taxed from April 1 onwards.

However, she has recently said that the limit has been upwardly revised to Rs 5 lakh per annum without employer's contribution. "In the 2021 Budget, tax free interest earned on PF contribution was capped at Rs 2.5 lakh in a year, mainly to discourage investment in PF by high income earners. This has been upwardly revised to Rs 5lakh where there is no contribution by the employer, thereby saving of the employees is only reckoned," Narayanan Sadanandan, MD & CEO, SBI Pension Funds told Bizz Buzz.

This cap applicable to PF will make investment NPS a better option and make it a better pension product as it doesn't have such cap, he added. The government's move will not have any impact on ordinary salaried class people. Rather, it will be the high networth individuals who are likely to be affected by this.

"Restricting the limit of PF contribution with attendant tax benefits to a maximum contribution of Rs 5 lakh will have no bearing on ordinary salary drawing employees. It is the ultra-high salaried persons who are contributing several lakhs as additional PF so that they get good returns that to without paying any tax on withdrawal will be affected by this amendment," says Shardindu Kumar, former MD & CEO of SBI Pension Funds. The HNIs who are likely to be affected by the government's decision comprise merely one per cent of a total number of 5 crore people that are covered under PF in the country at present.

Michael Dias, member, Central Board of Trustee, EPFO said that decision to this effect was taken during a meeting which was held in Srinagar sometime back. Agreeing to the fact that it will affect only a very few people, he said that there were many more decisions which had been taken during the meeting to ensure provide maximum benefit to the salaried class people. The decision to give an annual return of 8.5 per cent on PF investment was one among them, he added.