Indian Union Budget 2021-22: Broadly in India, there are 3 kinds of social safety contributions – Provident Fund, Superannuation Fund and National Pension System – created by employer which provide retirals advantages to staff and aid them in managing their post-retirement costs. Provident Fund (PF) is governed by the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act). Similarly, the contribution to Superannuation Fund (SF) is governed by the provisions of the Employees Superannuation Fund Act whereas contribution to the National Pension System (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
While the contribution to PF is mandatory for specific class of staff, nevertheless, the contribution to SF and NPS is not mandatory on employer’s portion and could be offered as an added advantage to employee on voluntary basis. Also, below SF, only employer is necessary to contribute, and employee can not be forced to make any contribution.
Regarding tax implications of a variety of social safety contributions created by the employer, the domestic tax law supplies tax exemption/deduction on employer’s contribution to these funds up to specified limits. The limits for such tax exemption /eligible deductions are discussed under:
*Any contribution to PF or SF more than and above these limits is taxable in the hands of staff as salary on which employer is necessary to deduct taxes at the applicable slab prices. Any contribution to NPS more than and above this limit is not permitted as deduction.
The Budget 2020 amendment gave rise to specific ambiguities in terms of actual implementation and connected nuances. Now, with Budget 2021, it is anticipated from the government that in addition to announcing the Covid-connected relief measures, specific persisting ambiguities and troubles (as discussed under) be also clarified.
Ambiguity among the PF law and the Income-Tax law whilst computing PF contribution
As per the prevailing PF law, an employer is necessary to contribute 12% of salary of employee as PF contribution. The ‘salary’ consists of simple wages, dearness allowance (DA) and retaining allowance (if any) and money worth of meals concession. Further, it also consists of the allowances which are not variable in nature and paid to all staff on uniform basis (as ruled by the Apex Court also). Contrary to this, as per the domestic tax law, salary for the goal of tax deduction on PF contribution consists of only DA and excludes all other allowances. Hence, there exists an incompatibility among the definition of salary whilst computing PF below the EPF Act and figuring out PF deductibility below the Income-tax law. Hence, it is suggested to align the definition of salary for PF contribution each below EPF Act and Income-Tax law to prevent any future litigation.
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The above amendment in the law really should also be created taking into consideration the newly-introduced social safety code exactly where the definition of ‘wages’ for the purposes of computation of PF contribution has been substantially changed. The new definition of ‘wages’ is anticipated to raise the PF contribution and therefore, it is the need to have of the hour to align the definition of earnings-tax law with PF law so that there is no undesirable hardship and litigation about claim of PF deduction in future.
Taxability of excess contributions to Social Security Funds – Amendment by Budget 2020
As discussed above, the Budget 2020 came up with amendment in provisions of Income-tax law as per which any excess contribution to PF, SF and NPS fund, which in aggregate exceeds INR 7,50,000, will be taxable in employee’s hands as perquisites. In other words, the all round tax advantage for employer’s contribution to these funds was restricted to INR 7,50,000. Also, any annual accretions by way of dividend/interest on such taxable contributions had been also created taxable as salary. Post this amendment, industries have raised a lot of issues and have some concerns as under:
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# The industries are awaiting a mechanism by means of which the facts of taxable annual accretion (i.e. dividend or interest) is necessary to be shared by the respective funds on a month-to-month/ annual basis so that the Employer could look at the suitable perquisite worth whilst withholding taxes on salary.
# It is also recommended that the manner/ chronology of allocating taxable contribution in excess of INR 7.5 lakh among the 3 schemes be specified. This is necessary due to the fact price of annual accretion is unique in all the schemes.
Hence, it is recommended to problem additional clarifications on this aspect to bring clarity and prevent any inadvertent non-compliance on employer’s portion.
Apart from the above distinct adjustments, it is also anticipated that the government would announce additional relief measures to tackle the losses suffered by enterprises from Covid-19. Earlier in the course of the pandemic, the government announced various relief measures in terms of lowered /forgone PF contributions, relaxation in PF connected compliances, permitting partial withdrawal of PF and so forth. for the advantage of staff and employers each. The government had also borne the PF contributions for the period from March to May 2020, for the staff drawing wages under INR 15,000 in the establishments employing up to one hundred staff exactly where 90% of them are drawing wages under INR 15,000. However, due to the fact the pandemic is not but more than and enterprises are nonetheless recovering, comparable advantages are anticipated in the upcoming price range to fight the Covid-19 pandemic in an helpful way.
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Towards this finish, the Ministry of Labour and Employment has also recommended to reduce the price of contributions for each employers and staff. Considering the financial slowdown and in order to increase the consumption, adjustments aimed at rising the take household salary of taxpayers would be a welcome move by the government.