Last 12 months, the federal government had introduced in a transfer to tax an employer’s contribution in the direction of numerous retirement funds vide Finance Act, 2020. This sought to tax contributions in the direction of Employee Provident Fund (EPF), Superannuation Fund and National Pension System (NPS) in extra of ₹7.5 lakh, which might be thought of as a perquisite within the arms of staff. The authorities additionally proposed to tax annual accretion by the use of curiosity, dividend or some other quantity of comparable nature accrued on such funds to the extent it pertains to the employer’s contribution. The methodology to calculate the accretions was notified on 5 March in Rule 3B of the Income Tax Rules, 1962.
Budget 2021 additional proposed to tax the curiosity accrued on an worker’s contribution to EPF above ₹2.5 lakh. Subsequently, there was an modification to Finance Bill, 2021, whereby the federal government added a further provision to extend the mentioned restrict to ₹5 lakh with a situation that the prolonged cap is relevant solely to the funds the place no employer contribution is concerned.
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The subsequent modification is definitely a aid to authorities staff as there is no such thing as a contribution by the employer to the General PF. However, it appears to convey no distinction to non-public sector staff, as a contribution to the Voluntary PF requires a compulsory contribution by the employer to the EPF concurrently. The methodology of calculating curiosity on the worker portion is awaited.
The amendments imply staff incomes a excessive wage revenue don’t get pleasure from full tax exemption standing anymore on investments in PF accounts. To add to the tax burden, curiosity accrued on worker contribution in extra of ₹2.5 lakh would even be taxed.
The amendments pose challenges to employers/staff.
1. There is ambiguity concerning which fund ought to be picked for extra contribution if there’s a contribution by the employer to each EPF and NPS (whether or not the Rule 3B method be utilized to every fund on particular person foundation or all of the funds on mixture foundation).
2. Rule 3B expects the accretion to every fund to be calculated as per the method. However, it’s not possible to calculate the worth of accretions for NAV-based funds like NPS, that are market linked. Here, the factors for calculation must be clarified.
3. It can be essential to notice that it’s tough for the employer to find out the precise PF curiosity because the curiosity for a monetary 12 months will get credited after the shut of the related monetary 12 months.
4. As the tax return requires correct reporting of revenue, the worker must consider the premise adopted by the employer for computing perquisite and assess if any extra disclosure is required. Employers ought to talk the premise of computation in order that the workers may revisit the computation and assess, if any extra disclosure is required.
The authorities’s intent is to rationalize tax-free revenue on EPF accounts. However, the above-mentioned factors should be addressed with a purpose to guarantee efficient implementation.
Amarpal S. Chadha is tax companion and India Mobility Leader, EY.
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