Govt hikes PF limit to Rs 5 lakh for earning tax-free interest

Finance Minister Nirmala Sitharaman on Tuesday raised the limit for tax exemption on interest earned on provident fund contribution by employees to Rs 5 lakh per annum in specified cases from Rs 2.5 lakh proposed in the Budget.

In the Union Budget for 2021-22, Sitharaman had capped the tax-free interest earned on provident fund contribution by employees and employers together to a maximum of Rs 2.5 lakh in a year in an attempt to dissuade high earners from parking their surplus in what is supposed to be a common man's retirement fund.

Replying to a discussion on the Finance Bill 2021 in the Lok Sabha, the minister said the tax-free limit is being amended to a maximum of Rs 5 lakh per annum.

This exemption is subject to the condition that the maximum of Rs 5 lakh contribution does not include the employer's contribution beyond the statutory limit of 12 per cent of basic pay.

"I intend to raise this limit to Rs 5 lakh only in those cases, where there is no contribution by the employer in that fund," she said. "So, most often, it is employee contribution and employer's contribution, but there are contributions, which are only (made by) employee and no employer contribution is made. In such cases that amount is raised to Rs 5 lakh."

The new provision will come into effect from April 1.

The minister clarified that the Rs 2.5 lakh limit covers 92-93 percent of the people who are subscribers and they are entitled to assured interest that is tax-free under this scheme.

The limits have been kept keeping in mind that small and medium taxpayers are not impacted by the step, she said.

The Employees' Provident Fund Organisation (EPFO) has more than six crore subscribers.

The Finance Bill was later passed by the Lower House with 127 official amendments by voice vote.

With the passage of the Finance Bill, which contains tax proposals for the next financial year, the Lok Sabha has completed the budgetary exercise for 2021-22.

With regard to disinvestment, Sitharaman expressed hope of meeting the target set for the next financial year as the market is buoyant.

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"I fully concede that in a year where your disinvestment was to be achieved, but when the markets were tepid, we couldn't move... I'm hopeful now, because even during corona we saw the way in which the market has been buoyant. So I'm hopeful that we'll be able to achieve that," she said.

The government has budgeted Rs 1.75 lakh crore from stake sales in public sector companies and financial institutions, including two public sector banks and one general insurance company, in the fiscal year beginning April 1.

The amount is lower than the record Rs 2.10 lakh crore that was budgeted to be raised from central public sector enterprise (CPSE) disinvestment in the current fiscal year.

For fiscal year 2021-22, out of Rs 1.75 lakh crore, Rs 1 lakh crore is expected to come from selling the government's stake in public sector banks and financial institutions; Rs 75,000 crore would come as CPSE disinvestment receipts.

She also criticised a member of Parliament for talking about a report by Freedom House, saying the MP should take up the matter of showing an incorrect map of India with the US think tank.