Is taxable PF interest (Rs 2.5 lakh) rule applicable to PPF?

The Budget 2021 has proposed that from April 2021, interest on any contribution above Rs 2.5 lakh per year in PF will be taxed.

There is some confusion among a few people that will this rule also apply to the Public Provident Fund (PPF) contributions?

The answer is No as per my understanding.

Very simply, the first reason is that the new limit set for this rule to kick in is Rs 2.5 lakh per year in annual contribution by the employee or person himself. And we all know that as per the latest PPF rules, the maximum annual PPF contribution that one can make is Rs 1.5 lakh.

So even if the Rs 2.5 lakh cap on contribution was applicable to PPF, even then it won’t be relevant as of now because of the Rs 1.5 lakh limit on annual contribution to PPF itself.

This means that for now, individual can still enjoy tax exemption on the interest earned on PPF contributions every year as PPF account holders are not allowed to contribute more than Rs 1.5 lakh per year in single PPF account.

So that is your simple answer to will new tax on PF interest cover contribution to PPF account as well?

The said rule though still applies to total contribution made by the employee in a year to EPF and VPF. So as long as the total of contributions to both EPF and VPF does not exceed Rs 2.5 lakh in a financial year, the account holder can continue to enjoy tax exemption on the interest earned on EPF and VPF contributions. If the employee’s total contribution to EPF and VPF together exceeds Rs 2.5 lakh in a financial year, then the interest earned on the excess contribution will be taxable in the hands of an employee.

Related Reading: Use this PPF Calculator to assess your PPF maturity amount or see how to use PPF to save Rs 1 crore?

Now I am no tax expert but seemingly, there are few more technical reasons as well as to why PPF contributions will not be considered for now for this new tax rule.

As per this article in Economic Times, “Technically the budget proposal would apply to both the EPF and the PPF, although this would apply independently to both and not in relation to an accumulation of the dues in both of them. The budget indicates that a new proviso will be introduced in both sections 10 (11) (which deals with the PPF) and 10 (12) (which deals with EPF) of the Income-tax Act,1961. The wording of the change suggests that the exclusions provided in those sections would apply in relation to amounts contributed “in that fund”. This implies that each of the funds would be treated separately and the intent is not to aggregate the amounts lying in the PPF together with those accumulated in the EPF and then apply the threshold of 2.5 lakhs. Therefore, if the contribution by an individual in a year to the PPF is 1.5 lakhs while that in the EPF is 3 lakhs, then it would only be the interest on the 50,000 (the excess contributed to the EPF over the 2.5 lakh threshold) which would be considered as taxable income for the employee and not the interest on 2 lakhs (being the aggregate amount in excess of the 2.5 lakhs threshold when combining the PPF and the EPF).

Another reason stated in the article says that “Contribution to PPF is covered under Section 10(11) of the Income-tax Act which cannot exceed Rs. 1.5 lakh during the year. Therefore, interest accumulated on PPF balance will still remain tax-free as contribution (to PPF) during any financial year will not exceed Rs. 2.5 lakh as prescribed by the amendment in Finance Bill 2021. Moreover, contribution to each provident fund needs to be seen separately and not in aggregate.”

So all said and done and practically speaking, the new rule change proposed in Budget 2021 that interest from PF contributions above Rs. 2.5 lakh is taxable currently does not apply to the PPF or Public Provident Fund. So for now, PPF is excluded from the new rule on PF interest being taxed.

Further Reading – How will EPF contributions above Rs 2.5 lakh be taxed? With 2 EPF accounts!

Further Reading: Should you still invest more than Rs 2.5 lakh in EPF after interest taxation rule?

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