The Central Board of Direct Taxes (CBDT) has issued a notification on August 31, 2021, to make Provident Fund (PF) contributions more than specific threshold limits and the interest on such excess contributions taxable from April 1, 2022.
From a tax-saving instrument, producing PF taxable has left the private sector workers a worried and confused lot.
Dr. Suresh Surana, Founder, RSM India clarifies the ambiguities and confusions that are arising amongst the Employees Provident Fund (EPF) subscribers due to this.
The Finance Act 2021 offered that any interest to the extent it relates to the quantity of Provident Fund contribution exceeding Rs 2,50,000 made by workers would be topic to tax. However, in instances exactly where only the employee is producing contributions to the Provident Fund, the threshold limit of Rs 2,50,000 would be enhanced to Rs 5,00,000. Thus, such an amendment would lead to dual accounts inside the Provident Fund account i.e. the Taxable as properly as the Non-Taxable element.
In furtherance to such amendment, the CBDT has vide Notification No. 95/2021 notified Rule 9D which offered for the manner of computation of taxable interest relating to contribution in a provident fund or recognised provident fund, exceeding specified threshold limit as aforementioned.
Rule 9D delivers for separate accounts to be maintained inside the provident fund account with respect to the taxable as properly as non-taxable contribution as follows:
The above-pointed out rule would be helpful for the monetary year 2021-2022 and all subsequent years for taxable contributions and non-taxable contributions made by a particular person.
Tax on Provident Fund interest: Will interest on PPF, GPF, CPF contributions also develop into taxable?
The not too long ago notified Rule 9D does not develop a lot ambiguity, rather clarifies on the computation mechanism of the taxable interest element. Further, the requirement of upkeep of separate accounts would add to more complications and compliance burden of EPFO as properly as these employers managing their EPF account of the workers.
Numerical instance of how EPF will be taxed
An employee possessing 10,00,000 in his EPF account tends to make a contribution of Rs 4,00,000 towards the EPF as properly as the employer is producing a equivalent contribution. In this case, the contribution would be bifurcated as follows:
How to spend the tax
There are some doubts about the liability for payment of tax by the employee versus the liability of the payer to withhold tax.
The liability for payment of tax by the employee is distinct vis-à-vis the liability of the payer to withhold tax. The liability to withhold tax currently existed u/s 192A of the IT Act for any particular person producing a payment of accumulated balance of EPF to any employee offered the quantum of such payment exceeds Rs 50,000 and the quantity is liable to tax in the hands of the employee. Thus, such a liability to withhold tax is not a outcome of the not too long ago issued CBDT Circular but currently embedded in Section 192A of the IT Act.
EPFO to problem TDS certificate
As per the provisions of IT Act, each and every particular person who deducts TDS though producing payment to an assessee, is below an obligation to problem TDS certificate to that assessee inside a prescribed limit of time. This certificate acts as a documentary proof based on which the assessee can claim credit of TDS though filing his Income Tax Return. Thus EPFO will have to problem TDS Certificates to these workers for whom Tax was deducted or withheld.
How to save tax
The EPF subscribers producing contributions exceeding the threshold limit ought to evaluate their investment strategy in the wake of taxation of the excess contribution and will have to evaluate other option investment possibilities, ahead of producing investments.