Giving relief to 4.71 crore subscribers of EPFO, the government has allowed tax exemption on the 9.5% interest income on PF deposits for 2010-11. The finance ministry notification last week raises the income tax exemption to 9.5% interest income from 8.5%. The decision clears the air for the EPFO subscribers who were given increased interest rate by one percentage point for 2010-11, but the finance ministry had not matched the interest hike with a commensurate tax exemption.
In the absence of the commensurate income tax exemption, the subscribers were earning higher returns even as it was liable to income tax.
EPFO had decided to provide 9.5% interest rate on PF deposits for 2010-11 after which it was endorsed by the finance ministry in March this year.
In 2001, finance ministry had allowed tax exemption on interest income of up to 12% on PF deposits. This exemption prevailed till August 31,2010.
In August last year, finance ministry had notified tax exemption of upto 8.5% tax on interest income on PF deposits from September 1, 2010, onwards which now stands superseded.
EPFO had decided to pay 9.5% rate of return for 2010-11 after it found a surplus of Rs 1,731 crore. But the rate was stagnant at 8.5% for five years since 2005-06.
EPFO had also maintained interest rate of 9.5% for three consecutive fiscals from 2002-03. The rate of return was 11 and 11.25 percent in 2000-01 and 2001-02 respectively.
The interest income was even higher at 12% 10 years during 1989-90 to 1999-2000.