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Contributions being sorted for taxation as EPF rate awaits approval

The interest rate to be provided by the Employees’ Provident Fund Organisation (EPFO) for the financial year 2020-21 is still awaiting the approval from the Finance Ministry, a senior labour ministry official said. “The proposal had been sent to the Finance Ministry for approval. It’s yet to be ratified by them,” the official told.

The Fund’s Central Board of Trustees (CBT) had in March recommended retaining 8.5 per cent interest rate for 2020-21. This rate, the same as last year’s, is the lowest offered by EPFO in eight years.

The recommended interest rate for FY21 is by norm ratified by the Finance Ministry, following which it is notified by the Labour Ministry. The Finance Ministry has been nudging the EPFO to reduce the rate to a sub-8 per cent level in line with the overall interest rate scenario.

Meanwhile, the EPFO is working upon implementing the Budget proposal for taxing interest income on contributions made to the EPF beyond Rs 2.5 lakh (for private sector employees) and Rs 5 lakh (for government sector employees). “The EPFO is working on the separation of taxable and non-taxable contributions in the accounts of the subscribers. It is to be done for about 1.2 lakh accounts and not the entire active 5 crore accounts, so it will not be a major issue to separate for those subscribers,” the official said.

The tax department had recently notified rules to implement the Budget announcement. The Budget proposal had noted that the government has found instances where some employees are contributing huge amounts to these funds and are getting the benefit of tax exemption at all stages — contribution, interest accumulation and withdrawal. With an aim to exclude high net-worth individuals (HNIs) from the benefit of high tax-free interest income on their large contributions, the government had proposed to impose a threshold limit for tax exemption. This will be applicable for all contributions beginning April 1, 2021. The tax department had recently notified rules to implement the Budget announcement.

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