TAXABILITY ON INTEREST ON EMPLOYEES CONTRIBUTION TO PROVIDENT FUND
The concept of Employer and Employee Contributions to Provident Fund was initiated to build a corpus fund for employee which can be used by employee at the time of retirement. Both employer and employee make contribution of 12% of Salary. Deposits in EPF fall under Exempt, Exempt , Exempt (EEE) Category i.e. Employee is not liable to pay tax at all 3 levels- Investment, earning and Withdrawals. Many High Net worth Individuals (HNIs) were misusing PF provision. They were deducting a major portion of their salary to PF in order to get benefits of high tax-free interest.
There are more than 4.5 crore EPF contributors, of which more than 1.23 lakh accounts belong to HNIs who have been parking huge sums on monthly basis. As of FY19, HNI’s contribution was Rs 62,500 crore. One of the highest contributors, for instance, had a balance of Rs 103 crore in his PF account, while another held more than Rs 86 crore. The top 20 HNIs have about Rs 825 crore in their accounts, while the top 100 have a balance of over Rs 2,000 crore. The purpose of making tax-free contributions was for tax free retirement corpus and not for tax evasion.
TAX ON INTEREST EARNED ON CONTRIBUTIONS ABOVE 2.5LAKHS
In order to rationalize tax exemption for income earned by High income employees, Budget 2021 has proposed to tax interest earned on contributions made to Provident fund above 2.5lakhs by employee in a year from 01/04/2021.
Interest earned on excess contribution i.e.2.5lakhs will be taxed in manner similar to that of Fixed deposits interest i.e. Interest shall be taxable as income from Other Sources on normal tax slab rate of individual and TDS will be deducted on taxable portion @ 10%. TDS will be reflected in Form-26AS and employee can take credit of TDS while filing return of income.
MAIN OBJECTIVE OF GOVERNMENT
This proposal will not impact all the contributors but will have huge impact on investment and savings of creamy layer of salaried employees which account for less than 1% of fund subscriber. Govt. wanted to collect more tax from high income earners but they were putting their earnings in tax free basket. Therefore this proposal is being introduced.
SOME CONSIDERATIONS NEEDS TO GET ANSWERED-
1. How will interest be calculated? Whether statement will provide taxable and tax-free interest?
2. Whether EPF Department will deduct TDS?
3. Whether interest-on-interest from excess contribution will be taxed in future years?
If you also fall in the high tax bracket and rely on EPF or VPF to build a large retirement corpus, your retirement plans will take a hit because of this new taxation rule as interest earned on contribution above Rs 2.5 lakh in a financial year will no longer be exempted. I-T department would make available all the information it is receiving from various other agencies like Securities and Exchange Board of India (Sebi) or Ministry of Corporate Affairs (MCA), Department of Customs and Excise in form 26AS to facilitate taxpayers to file correct tax returns. Now it is not possible to evade tax and perform cash transactions. Salaried persons are bound to pay taxes and for Business houses TCS u/s. 206C(1H) and TDS u/s. 194Q i.e. TDS/TCS on purchase and sale of goods have been introduced so that every person earning income pays tax. It is therefore advised to file income-tax returns wisely.
The above comments do not constitute professional advice. The Author can be reached at firstname.lastname@example.org or visit website www.financialtreecompany.com . My name is CA Divya Agrawal and I am Practising Chartered Accountant, CEO and Founder of FINANCIAL TREE COMPANY (An online return filing and Tax Consultancy Company). We also upload educational videos in You tube and name of our channel is FINANCIAL TREE COMPANY. Our aim is to help people in improving their financial health by spreading knowledge and love. Stay Financially Fit and Healthy.