On August 31, the Central Board of Direct Taxes (CBDT) has issued new rules regarding the contribution made to the Provident Fund (PF) and the interest earned from it. Now its limit has been fixed and if the contribution or interest is received above the limit, then tax will have to be paid on it. Till now PF was considered as a means of saving tax, when it will be taxed, then the concern of private sector employees has increased.
What is the new rule?
A clear provision was made in the Finance Act 2021 that if the employee contributes more than Rs 2.5 lakh to the Provident Fund, then it will be taxed. However, if the company does not contribute to the employee’s provident fund, then this limit will increase from Rs 2.5 lakh to Rs 5 lakh.
Thus, this change in the law states that within the provident fund also two accounts will be created – 1. taxable and, 2. non-taxable component. The CBDT notified Rule 9D by issuing notification number 95/2021, which lays down the manner of computation of taxable interest earned on contribution to Provident Fund or recognized Provident Fund.
Rule 9D states that two separate accounts have to be maintained in the Provident Fund, which will be as follows-
Taxable Contribution: The taxable component of the contribution to PF (i.e. on depositing more than the limit in PF) and interest earned thereon. The amount withdrawn from such account has to be deducted from it.
Non-taxable contribution: Closing balance of EPF account as on March 31, 2021. Non-taxable portion made in contribution and interest received thereon. The amount withdrawn from such account has to be deducted from it.
This new rule will be applicable on taxable contribution and non-taxable contribution by an individual in the financial year 2021-22 and subsequent years. The new Rule 9D clarifies how the taxable interest component will be calculated. Maintaining two separate accounts of each individual will increase the burden on the EPFO. Also for companies that manage EPF accounts of their employees.
What is the logic behind this move of the government?
Till this year’s budget, income from provident fund was not taxed. So that people can get the benefit of lump sum amount at the time of retirement. The Finance Ministry says that this provision was being misused. Finance Minister Nirmala Sitharaman said in the budget speech that some people are contributing up to Rs 1 crore every month in their PF account.
He had said that one who contributes Rs 1 crore cannot be compared with one who earns Rs 2 lakh and gets 8% return on PF savings. There should be a cap on this profit so that tax can be imposed on those who are putting a majority of their income in these funds.
When it was criticized, the revenue department responded in detail. It said 1.23 lakh High Net Worth Individuals (HNIs) deposited Rs 62,500 crore in their Employee Provident Fund (EPF) in 2018-19. A balance of Rs 103 crore has been found in one account. At the same time, the total balance of the top 20 HNIs is Rs 825 crore. In 4.5 crore EPF accounts, only 0.27% of the members have an average corpus fund of Rs 5.92 crore. These people are earning up to Rs 50 lakh annually on the pretext of PF without paying tax.
This is the second time that the NDA government has imposed tax on EPF savings. In 2016, it was announced in the budget that 60% of EPF account balance at the time of withdrawal will be taxed. The proposal was turned down after protests. In last year’s budget, employer contribution to employee welfare schemes like EPF or National Pension Scheme (NPS) or superannuation plan was capped at Rs 7.5 lakh per annum.
What type of PF accounts will be affected by the new rule?
EPF accounts are mandatory for those people who earn less than Rs 15,000 per month and have more than 20 employees in their company. 12% of the basic pay and dearness allowance of the employees is deducted as contribution and 12% is contributed by their company.
Most of the private sector EPF accounts are managed by the Employees’ Provident Fund Organization (EPFO). At the same time, the EPF accounts of government employees are managed by the General Provident Fund (GPF). The new rules will be applicable on all these accounts.
Some large companies form their own ‘exempt’ EPF trusts to manage the retirement savings of their workforce. Their purpose is to save the employees from making rounds of government offices at the time of retirement.
However, there will be no impact of the new tax on retirement savings deposited under Public Provident Fund (PPF) and National Pension Scheme (NPS).
What you should do?
Nothing at the moment. As a PF account holder, you have nothing to do now. If your EPF contribution as an employee is ₹ 20,833.33 per month or ₹ 41,666.66 or less without contribution from the company side, then the new tax rules will not affect you.
If your contribution is more than this, then you need to reconsider whether such voluntary contribution should be continued or not? The interest on bank deposits is not getting very much, so you should talk to your accountant or investment advisor whether to add more amount in EPF accounts even after taxation?
Under the IT Act, if any person or company deducts tax as TDS before payment, then it has to issue TDS certificate. If EPFO, GPF or EPF of companies deducted tax, then it will have to issue TDS certificate to the employee.
Will it be easy for EPFO to levy tax?
No. 24.77 crore members have EPF accounts in EPFO. Out of these, 14.36 crore have been allotted Unique Account Number (UAN) till 2019-20. 5 crore members were getting money in their EPF accounts in 2019-20. Even though a technical solution has been created in the new system to create two EPF accounts for each member, a number of concerns remain.
The trustees of PF will have to issue TDS or IT Form 26AS for all such members. The government has not yet clarified what is the preparation of EPFO, the country’s largest retirement fund manager with assets of about Rs 15 lakh crore.
