There are many changes in the tax rules effective 1st April 2022, Out of which I am going to discuss are New tax rules on EPF Interest, Taxation of Virtual Digital Assets, Filing of Updated IT Return and Tax relief on Covid-19 treatment expenses and compensation.
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1. New tax rules on EPF Interest:
Effective April 1, the tax will be imposed on interest earned on the contribution to Employees Provident Fund (EPF) if the amount is in excess of the threshold limit of Rs. 2.5 lakh every year. This new rule is governed under section 9D of the Income-Tax Act.
For the purpose of calculation, the contribution to the PF accounts up to Rs. 2.5 lakh is tax-free. But, if an employee contributes in excess of the above-mentioned limit, the tax will be imposed on the interest portion earned on the excess contribution. It is important to note that only the interest amount on the excess contribution will be considered for tax calculation, and not the contribution amount.
This rule has been introduced targeting the high-class taxpayers, preventing them from taking advantage of the government-backed scheme. Because they would park their excess funds in EPF to earn tax-free interest. However, low and middle-class taxpayers will not be affected by this rule.
For example, if an employee contributes Rs. 5 lakhs to EPF in a year, out of that Rs. 2.5 lakhs will be taxable and interest on that part shall be taxed in the hands of the employee year after year.
2. Taxation of Virtual Digital Assets:
Union Budget 2022 announced a specific tax provision for virtual digital assets (VDA). The government said that any income from the transfer/sale of any virtual digital asset such as bitcoin, cryptocurrencies, non-fungible tokens (NFTs) shall be taxed at the rate of 30% plus cess and surcharges, and it also proposed to include a provision for TDS which shall be inserted under section 194S to the Act which provides for deduction of tax on payment for the transfer of virtual digital assets to a resident at the rate of 1% of such consideration above a monetary threshold (see below note).
In addition to the above, loss from the transfer of virtual digital assets cannot be set off against any other income.
Here is an illustration of how the TDS will work – A user buys a bitcoin valuing Rs. 1 lakh. Later in the year, the value drops to Rs. 50,000 and he decides to sell his holdings at a loss of Rs. 50,000. So, when he withdraws 50,000 to his bank account, he will only receive 49,500 after deduction of TDS at 1%. Let’s say, he hasn’t made any other transactions in crypto for the rest of the financial year. So, while filing tax returns, you will show that you booked a loss of Rs. 50,000 and hence, TDS of 500 will be refunded to you. Since you made an overall loss in your crypto investments, you aren’t supposed to pay tax. However, in the next year, suppose you made a profit in your crypto investments, and you estimate paying tax on the net income after setting off the loss from the previous year. However, the government doesn’t agree to this because as per the provision, the losses from virtual digital asset transactions can’t be carried forward.
The following things are to be noted:
- Crypto transactions for the ongoing year (i.e., till March 2022 period) will also be taxed.
- The provisions related to 1% TDS will come into effect from July 1, 2022, while the gains/profit on the transfer of VDA will be taxed effective April 1, 2022.
- For the purpose of 194S, the threshold limit for TDS deduction is Rs. 50,000 in the case of specified persons and Rs. 10,000 in case of non-specified persons.
- Specified persons – An individual/HUF whose total sales or gross receipts do not exceed Rs. 1 crore in case of business, OR Rs. 50 lakhs in case of the profession, during the immediately preceding financial year, OR, an individual or HUF, who does not have any income under the head business or profession. In such case, TDS u/s 194S is required to be deducted only if the amount of purchase consideration for the purchase of a virtual digital asset exceeds Rs. 50,000/- during the financial year.
- In the case of a person other than such a specified person, which includes Firms, LLPs, and Companies, TDS u/s 194S is required to be deducted only, if the amount of purchase consideration for the purchase of a virtual digital asset, exceeds Rs. 10,000/- during the financial year.
- Losses from virtual digital asset transactions can’t be carried forward. The benefit is available for businesses, mutual funds, and stocks but not for virtual digital assets.
- Gifts of such virtual digital assets are to be taxed in the hands of the recipient.
- While calculating the income from the transfer of VDA, no expenditures are allowed as deductions except for the cost of acquisition.
- Income Tax Return (ITR) form from next year will have a separate column to declare gains from crypto.
However, taxing crypto-currency does not legalize such transaction/currency. The government is working on legislation to regularize cryptocurrencies. Meeting demands from large sections of industry; the RBI will launch a ‘Digital Rupee’ based on blockchain technology in fiscal 2022-23.
3. Filing of Updated IT Return:
Earlier, you only had a window of 5 months from the due date of filing returns, to revise the tax returns. Now, there is a new provision introduced that allows filing updated tax returns within a period of two years from the end of the relevant assessment year. However, the updated return cannot be filed to report additional loss or decrease in the tax liability. This provision is introduced to provide an opportunity to include missed or undisclosed income or any other error leading to less filing of tax in the original tax return.
When reporting such additional income, the taxpayer would also be required to pay additional tax at the rate of 25% if the updated return is filed between 1 to 12 months (1st year) or 50% on the additional tax if the updated return is filed between 13 to 24 months (2nd year) from the end of the relevant assessment year. The tax is required to be paid before the filing of the updated tax return and proof to that extent is required to be attached while filing the updated return.
4. Tax relief on Covid-19 treatment expenses and compensation:
As per the Press Release on June 2021, tax exemption has been provided to persons who have received money for Covid medical treatment. Likewise, money received by family members on the death of a person due to Covid will be exempt up to Rs. 10 lakhs for family members if such payment is received within 12 months from the date of death. This amendment will be effective retrospectively from April 1, 2020.
The author can be reached at sharathtt4@gmail.com for any queries.
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Whether the refund of PF loan (or refundable PF advance) will also be added to employee contribution for the purpose of calculating 2.5 lakh contribution limit?
Won’t it be a case of double taxation since original contribution & interest was taxed at 0% as per prevailing tax rate. But now counting this refund as fresh contribution, its future interest will be considered taxable unlike earlier.