Interest on worker contribution to provident fund (PF), hitherto exempt, was made taxable vide the Finance Act, 2021, on contributions exceeding a prescribed threshold of ₹2.5 lakh ( ₹5 lakh in circumstances the place there isn’t any contribution by the employer) in any monetary 12 months (FY). The goal of Budget 2021 was to restrict the exemptions granted with respect to the accrued stability payable to an worker.
The much-awaited methodology of calculation of this curiosity was notified by tax authorities on 31 August.
The newly prescribed rule requires upkeep of separate accounts inside PF, for non-taxable contributions and taxable contributions. The non-taxable contributions could be the combination of the closing stability of the account as on 31 March 2021 and the contributions made in the course of the FY and subsequent FYs as much as the prescribed threshold and would additionally embrace any curiosity accrued on the above however as lowered by any withdrawal(s). The taxable contribution would come with contributions in the course of the 12 months and subsequent FYs in extra of the prescribed threshold and the curiosity accrued on the identical as lowered by withdrawal(s).
While this notification has given some readability, there are nonetheless some open questions.
One important side is: What is the purpose of taxability? Will this curiosity be taxable on the time of accrual or credit score into the account, or on the time of withdrawal from the PF account? What is the likelihood that the PF authorities would withhold the taxes on such taxable portion, and at what cut-off date?
While readability is awaited, making use of common ideas, people following the mercantile system of accounting on an everyday constant foundation could have to supply the curiosity to tax on accrual foundation within the monetary 12 months wherein it arises. Such people should observe the curiosity supplied to tax in order that the identical isn’t doubly taxed on the level of withdrawal.
Others following a money system may argue that the curiosity is to be taxed solely on receipt on withdrawal sooner or later. Maintaining books of accounts may assist substantiate the tactic of account on the time of evaluation.
Typically, the PF rate of interest is introduced and the curiosity is credited after the shut of the tax 12 months. Hence, this might pose one other problem in ascertaining the curiosity credit score to be thought of for taxation.
One of the potential views is to contemplate the rate of interest in keeping with the speed declared for the prior 12 months and the shortfall or extra if any on credit score of curiosity may very well be thought of on the time of submitting of the return or revised return.
Employees can also select to both declare the taxable curiosity portion to the employer, who would then take into account the identical for the needs of tax withholding or pay the taxes on the identical by means of advance tax or self-assessment tax on the time of submitting the return.
Employer-managed PF trusts may additionally face challenges. The accountability of sustaining separate accounts for taxable and non-taxable contributions, and the requirement for tax withholding, in circumstances the place relevant, would fall upon the belief.
Budget 2021 and the current notification search to restrict the exemption granted to workers incomes an annual wage exceeding roughly ₹40 lakh (assuming 50% of complete wage to be PF wages) and parking large funds in PF. It is obvious that the intent is to not tax these within the decrease employment earnings brackets. One would want to attend and watch how the identical is run.
Tapati Ghose is accomplice, Deloitte India.
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