The finance minister has proposed to partially tax the interest accrued on the provident fund account of workers.
Let us go over the provision.
Present Provisions
Presently, any payment received by an employee from his provident fund account is totally tax-no cost. The very same could be received either as partial withdrawal as permitted below the scheme or one received just after retirement. The payment received from the provident fund comprises of contribution produced by the employer and the employee as properly as the interest accrued on the contributions.
Last year, the government amended the tax laws to place a cap on the maximum quantity of contribution produced by an employer towards provident fund, the National Pension System and superannuation scheme to Rs 7.50 lakh beyond which the very same is taxed as perquisite in the hands of the employee. Moreover, the amendment supplied that any interest attributable towards the excess contribution beyond Rs 7.50 lakh was also to be treated as perquisite in the hands of the employee.
An employee is expected to contribute 12% of his fundamental salary and dearness allowance towards the employee provident fund account, which is expected to be matched by the employer by equal contribution. There is no such restriction on the employee contributing beyond 12% as voluntary contribution. Since the interest prices have come down drastically and the price of interest declared by the government is quite appealing and which also comes tax-no cost in the hands of workers, workers are opting for larger voluntary contribution. Since this is in contrast to taxation of maturity proceeds of NPS of which only 60% comes tax-no cost and the balance is indirectly taxed in the type of annuity as the subscriber has to invest in annuity of minimum of 40% of the corpus. So, there was demand for bringing in parity of taxation involving these two retirement merchandise which government attempted to do in the previous, but with no accomplishment.
What is the proposal and what are its implications?
Since the interest on contribution produced by an employee enjoys tax exemption devoid of there becoming any upper limit, the government has proposed that interest accrued in respect of employee’s contribution in excess of Rs 2.50 lakh just about every year shall turn out to be taxable in the hands of the employee. So, the interest in respect of annual contribution of Rs 2.50 lakh only will stay tax-no cost and any interest accrued on excess contribution shall turn out to be taxable in the hands of the employee year just after year.
It is not that the calculation of interest on excess contribution has to be completed as soon as only but it has to be produced just about every year for excess contribution produced for each and every of the previous years. In my opinion, to count on the employee to make such calculation year just after year is also a great deal. If the government does not want the workers to earn tax-no cost interest for contribution beyond Rs 2.50 lakh, it ought to place a cap on maximum contribution just about every year toward provident fund like one which is applicable in case of the Public Provident Fund (PPF) account. This is in contradiction to the proposals contained in the new labour code exactly where the employer and employee will have to make contribution toward provident fund on larger quantity as the definition of the salary is proposed to be changed in the new labour code.
In my opinion, because we do not have a social safety technique in our nation, why ought to the government discourage anybody from contributing a larger quantity towards his retirement fund? The government ought to rethink on this proposal.
There is one more proposal which will straight influence the workers who have a provident fund account. Since the employee gets the interest from the date when the employer deposits the dollars with provident fund authorities, the workers used to endure for no fault of their. This spending budget gives that in case the employer fails to deposit the provident fund dollars by the due date, he will not be permitted the deduction for such contribution which in turn will force the employers to spend the contribution by the due date and as a result enable the employee earn interest for the reputable period.
(The writer is a tax and investment specialist, and can be reached at [email protected])