Till now ALL contributions -- both Mandatory and Voluntary -- to your Provident Fund account enjoyed TAX-FREE interest income (provided you had completed 5 years of service).
Besides, the interest rates on PF have typically been among the highest in the fixed-income schemes offered by the Govt. of India.
Therefore, people have often maximized their investment in their Provident Fund Account, by investing more than the mandatory limit as a Voluntary PF contribution.
This is now history.
As per the Budget 2021 announcements, 'employee' contributions ONLY up to a maximum of Rs.2.50 lakhs per annum would continue to enjoy the tax-free status [Important: See 'Note' later]. And, interest earned on the amount deposited exceeding Rs.2.50 lakhs, will henceforth be taxable.
As you would be aware, 12% of the basic pay + dearness allowance has to be compulsorily invested in your PF Account. In fact, this happens automatically. Every month your employer deducts this amount from your salary and deposits the same to your PF account on your behalf (together with the employers' own contribution).
In other words, your total contribution — i.e. 12% mandatory + VPF or Voluntary Provident Fund, if any — exceeding Rs.20,833 per month (i.e. Rs.2.50 lakhs per annum) will come under the tax net. The employers' contribution is NOT part of this specified limit.
Note: The Rs.2.50 lakhs tax-free limit is for cases where both the employee and employer are contributing to the PF A/c. In cases where ONLY the employee contributes to his/her PF A/c, the tax-free limit would be Rs.5 lakhs, and interest earned on the contribution in excess of Rs.5 lakhs per year would be taxable.
Of course, this budget proposal will impact mainly (a) the high-salaried individuals and (b) those who have been contributing over and above the 12% mandatory limit as Voluntary contribution to earn 'high' and 'tax-free' interest.
How would this work?
Simple! The 'excess' contribution will be maintained as a separate sub-account, just like any other bank fixed deposit account. And, EVERY YEAR, the interest earned on this 'excess' corpus will have to be included in your taxable income and taxed as per your slab rate.
This new taxation is applicable on all excess contributions starting from April 1, 2021.