The EPFO on March 12, 2022 lowered the interest on PF deposits for 2021-22 to an over four-decade-low of 8.1 per cent from the previous rate of 8.5 per cent.
After the Central Board of Direct Taxes (CBDT) – through its notification dated August 31, 2021 – made the interest on Provident Fund (PF) contributions over Rs 2.5 lakh made by the employees – where the employer is also making matching contributions – in a financial year taxable from April 1, 2022, the Central Board of Trustees of the Employees’ Provident Fund Organisation (EPFO) on March 12, 2022 lowered the interest on PF deposits for 2021-22 to an over four-decade-low of 8.1 per cent from the previous rate of 8.5 per cent.
The double blow has made it unattractive for the subscribers getting high salary and who are making large voluntary contributions to PF to make a considerable part of their salary tax-free.
According to the Finance Act 2021, any interest to the extent it relates to the amount of PF contribution exceeding Rs 2.5 lakh made by employees would be subject to tax.
However, government employees contributing to the General Provident Fund (GPF) have some relief, as in cases, where only the employee is making PF contributions, the threshold limit of Rs 2,50,000 would be enhanced to Rs 5,00,000.
But the lower interest rate of 7.1 per cent on GPF contribution is a dampener for the government employees, as even after the recent rate cut, the interest rate on EPF remains comparatively high at 8.1 per cent.
After the contribution above the threshold limit is made taxable, dual accounts will now be maintained within a Provident Fund account – one with a taxable component and the other with a non-taxable component.
So, how the employees making excess contributions may save tax now?
To save tax, such employees need to explore other tax efficient schemes. Some of such schemes are –
PPF
As the threshold limit is applicable separately on separate PF schemes and not on the combined contributions on different schemes, such employees may divert up to Rs 1.5 lakh contribution to the Public Provident Fund (PPF) to reduce the excess contribution on EPF / CPF / GPF on which the interest becomes taxable.
ULIP
With complete tax exemption, Unit Linked Insurance Plan (ULIP) offered by insurance companies is also a viable alternative for the employees facing tax deductions on interest on excess PF contributions.
ELSS
Equity Linked Saving Scheme (ELSS) is another tax-saving instrument that has the capacity of providing superior tax efficient returns in the long run. Apart from the ELSS, the employees facing tax cut on their excess PF contributions may also invest in other Mutual Fund (MF) schemes – especially through SIP for equity-oriented schemes – for long-term investments to get higher tax-efficient returns.
