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Employers’ PF contribution tax norm creates confusion

Employers’ PF contribution tax norm creates confusion

05 Apr 2021

(This story originally appeared in on Apr 05, 2021)

New Delhi: Before deciding to tax interest earned by private sector employees contributing over Rs 2.5 lakh towards provident fund from April 2021, the government had decided to bring employers’ contribution of over Rs 7.5 lakh towards retirement savings into the tax net last year.

In the previous year’s Budget, finance minister Nirmala Sitharaman had decided to tax employers’ contributions to provident fund, National Pension System (NPS) and approved superannuation funds in excess of Rs 7.5 lakh annually as a perquisite in the hands of employees, apart from the annual accretion on the “excess contribution”.

To begin with, the income tax officials in North Block took 13 months to ready the rule, which came on March 5 this year — less than four weeks before the close of the fiscal year. Given that the rules were confusing (some also call it impractical) employees and tax practitioners were left with little time to tackle the problems. Employees bear the liabilities of tax estimation and payments.

While employees were to pay tax by March 31, they did not have the interest rate on Employees Provident Fund (EPF) for the year available with them as the labour department is yet to notify the rate for 2020-21.

There are problems with NPS returns too. “It is not feasible to calculate the value of accretions for NAV based funds like NPS, which are market-linked. In such cases, criteria for calculation needs to be specifically addressed by the tax department,” said Amarpal Chadha, tax partner and India mobility leader at consulting firm EY.

“This may pose a practical challenge as the perquisite value computation will only be possible once the closing balance in the funds is made available (which is likely to be available only after March) and any tax to be withheld from employees will need to be factored in the payroll process for March itself,” added Gautam Mehra, partner at PwC India.

One way out could be for employees to settle the taxes through the self-assessment mechanism. “We should not look at taxing the annual accretion to NPS unless it is actually paid out. If after considering the notional gains, there is a loss in future years, the individual should be allowed to set-off such loss with the income,” said Mehra.

There are other practical difficulties, which the income tax department has not factored in while preparing the guidelines. “There is an ambiguity on which fund should be picked for excess contribution, whether the formula is to be applied to each fund on individual basis or all the funds on aggregate basis,” said EY’s Chadha.