Employees Provident Fund (EPF or PF) is without doubt one of the few retirement financial savings schemes obtainable to the organized sector with vital tax advantages and sovereign-backed returns, which is usually greater than most different fixed-income merchandise. Tax exemptions can be found on the contributions made, on the accruals in addition to on the withdrawals (this triple taxation profit is called EEE or Exempt, Exempt, Exempt scheme).
With the target to restrict the tax advantages on PF to members who make excessive contributions, usually carried out by way of Voluntary Provident Fund (VPF), Budget 2021 had launched the taxation of curiosity earned on worker contributions exceeding ₹2.5 lakh per monetary yr efficient FY 2021-22. This applies solely to contributions made by the worker and never the employer.
For instances the place the employer doesn’t contribute to the worker’s PF, the edge past which curiosity might be taxable is ₹5 lakh.
Practical facets to be thought of
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The Central Board of Direct Taxes (CBDT) had issued a notification final yr explaining how it will work. The worker contributions might be segregated into two accounts holding taxable and non-taxable corpus. The taxable corpus would come with worker contributions in extra of ₹2.5 lakh efficient FY 2021-22 and the associated curiosity as diminished by any withdrawals.
The credit score of taxable curiosity additionally triggers withholding tax obligations, in respect of unexempted institutions. This can be the duty of the Employee Provident Fund Organisation (EPFO). However, organizations with PF Trusts would wish to gear as much as segregate the corpus and in addition meet the tax withholding obligations. The restrict of ₹2.5 lakh is as per monetary yr efficient FY 2021-22, and would come with voluntary contributions as effectively. Interest accrued on such contributions can be taxable as “earnings from different sources” and would kind a part of the taxable corpus.
The curiosity accretions might be taxable even in a state of affairs the place the continual service of the member with the employer exceeds 5 years.
Taxpayers have the choice to supply to tax “earnings from different sources” on an accrual foundation or on a money foundation. Accordingly, taxpayers would wish to assert the taxes withheld within the related tax years through which the earnings is obtainable to tax.
Advance tax obligations are required to be stored in thoughts. Employees even have the choice of declaring their private earnings to the employer in order that tax obligations on such earnings are adequately lined.
Pitfalls to be prevented
It is important to know the monetary influence of the taxability of curiosity earlier than deciding to cut back PF contributions.
One knee-jerk response from many workers may very well be to think about PF contributions as unattractive from a tax perspective and restrict the contributions to the statutory wage ceiling of ₹15,000. This would imply that worker contribution is proscribed to ₹1,800 monthly.
It is essential to keep in mind that employer contributions to PF are eligible for tax exemptions ( even below the simplified tax regime) and worker contributions are eligible for deduction u/s part 80C below the common tax regime.
The desk offers a comparative monetary influence evaluation the place an worker decides to restrict PF contribution to the statutory wage ceiling and chooses to pay taxes below the common tax regime.
There are points such because the method to be adopted when an worker avails mortgage—whether or not to be adjusted from taxable or non-taxable corpus, whether or not true as much as the withholding is required when the precise rate of interest differs from that estimated through the yr finish, and many others.
Currently, the principles don’t cowl these facets aside from the truth that two separate accounts would should be maintained. EPFO/ CBDT could must give you additional pointers which may probably present clarification on these points.
Saraswathi Kasturirangan is companion with Deloitte India. Prashanth G, supervisor with Deloitte Haskins & Sells LLP has contributed to the column.
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