The backdrop
Till monetary yr 2019-20, solely contribution by the employer to the account of an worker greater than the prescribed thresholds was taxable as perquisite within the arms of the workers. (See Chart 1)
Contributions as much as the prescribed threshold didn’t get taxed at any level of time, since Exempt-Exempt-Exempt (EEE) regime was adopted for these retiral funds.
Even although a separate threshold was prescribed for every fund, there was no mixed financial threshold for employer’s contribution to such funds. As a results of this, sure people have been in a position to construction their compensation in a way that a big portion of their wage was paid by employer within the specified funds. However, provided that the employer’s contribution was properly throughout the aforesaid limits, the contribution was not taxable.
Further, given the EEE regime, such contributions have been by no means topic to tax. The authorities vide Finance Act 2020 determined to supply an general cap on the employer’s contribution to PF, SAF and NPS.
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New taxation provisions
The authorities vide Finance Act, 2020 determined to tax the employer contribution to those specified funds, in extra of sure limits and annual accretion thereon. This accretion may very well be in type of curiosity, dividend or another quantity of comparable nature.
Accordingly, efficient FY2020-21, it was supplied that if the combination contribution made by an employer to the required funds is in extra of `7.50 lakh (extra contribution), then the surplus contribution might be taxable as perquisite within the arms of the worker. Such perquisites might be included in worker’s wage and taxed on the relevant slab charges. This additionally consists of the curiosity or revenue accrued in respect of such extra contribution.
Recently, the federal government additionally notified the way of computing the annual accretion by the use of curiosity, dividend, and so forth., on such extra contribution. A formula-based strategy has been prescribed which, inter-alia, requires particulars of opening and shutting steadiness of those funds and the rates of interest or NAVs, because the case could also be.
Implications for the employer
The employer is required to estimate the taxable wage of worker and withhold tax at common charge of tax through the monetary yr. Accordingly, the employer is now required to withhold tax on extra contribution and the annual accretions thereon in these funds.
Challenges forward
As a results of the aforesaid adjustments and computation methodology prescribed, there are specific sensible challenges being confronted by employers which should be addressed:
* Cases the place employer is contributing to a couple of specified fund. (See Chart 2) In such instances, there’s lack of readability on how this extra contribution i.e. ₹50,000, is to be computed. In different phrases, the surplus contribution could be attributable to which fund has not been clarified. Therefore, a query arises whether or not an employer can suo moto resolve or allocate it proportionately to all of the funds within the ratio of contribution made by it.
It is pertinent to notice that this could even have a consequential affect on the taxable accretions as properly, that are labored out in another way for these specified funds.
* This methodology for computation of accretion on extra contribution, relevant for 2020-21, was notified on 5 March 2021 and therefore, corporations have to now think about this whereas figuring out the taxes to be deducted for FY2020-21. This poses a sensible problem for the employer, being the tip of the monetary yr.
* Information just like the earnings of the fund, and opening and shutting steadiness of the required funds just isn’t available through the yr, with the employers. They want to hunt these particulars from the workers and there could also be knowledge privateness issues for the workers. Even if the workers reluctantly share these particulars, sufficient documentation to substantiate this data would additionally should be maintained by the employer. This will add to the executive burden for the employers.
* The different problem could be by way of availability of the rates of interest e.g. the rates of interest for PF will not be introduced initially of the monetary yr, it could be troublesome to compute the revenue accrued through the yr. Accordingly, for such instances, the federal government ought to present steering concerning the way through which the taxable perquisite is to be computed through the yr. Should the employer think about the rate of interest of final yr or common rates of interest of final two earlier years, and so forth. One technique to resolve this situation is {that a} true-up is completed by employer earlier than issuing Form 16, if the speed is out there by then or the workers might achieve this in his / her revenue tax returns.
* In most instances, the revenue accrued for the whole monetary yr might be ascertained solely after the tip of the monetary yr, for the reason that contribution for March 2021 would additionally kind a part of the whole quantity on which the accrued revenue is to be decided. So, readability is required if the true-up may very well be performed by employer within the subsequent monetary yr.
* There could be a separate set of challenges when staff be part of or depart the group through the yr i.e. instances the place settlements are pending.
* In case of specified funds that are NAV-based (NPS), the NAV continues to vary through the yr and the ultimate NAV is out there solely after the tip of the monetary yr.
The above points might result in administrative challenges each for the employers and staff. It is feasible that totally different approaches could also be adopted by totally different organizations, which can result in unintentional non-compliance, dispute and litigation. Therefore, a few of these points require consideration and ought to be clarified.
Vikas Vasal is nationwide managing accomplice–Tax at Grant Thornton Bharat LLP.
Richa Sawhney and Ankita Chowdhry contributed to this text.
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