PF tax norms creates confusion

There has been a confusion regarding change in the EPF and also NPS rules that the employees and tax practitioners have to face. A very little time was left and there was no clear cut way out to solve the problem for the financial year ending on 31st March 2021 as the announcement came on 5th March. Making the tax estimation and payment thereof before the due date posed a genuine difficulty to be dealt with by many.

The budget for the current year provided for tax on interest earned by private sector employees contributing over Rs 2.5 lakh towards provident fund. Similarly, Finance minister Nirmala Sitharaman introduced a few changes in the previous year’s budget 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. 

The labour department is yet to notify the rate of interest for 2020-21. This kept the employees clueless at which rate they should calculate interest on EPF despite the fact that they were supposed to pay tax before 31st March 2021.

There is no mention of the taxability of interest accruing on or after 1st April, 2021. Note that taxability will be there only for those employees whose contribution is Rs.2.50 lacs or more during a financial year to their respective PF accounts. 

In order to discourage employees who enjoy tax free interest on their PF, a provision has been inserted in section 10(11) and 10(12) of the Income Tax Act, so that taxability of interest on PF becomes at par with interest from other investments.

Government is expected to come with a simple method of computation of taxable interest on PF and at the same time not causing hardship to those employees whose PF interest becomes taxable because of border line contribution as the situation prevails in case of deduction u/s 87 A.

The returns on NPS too face similar issues. Calculating the value of accretions for NAV based market linked funds like NPS is not feasible. The Tax Deparmartment is expected to guide in this matter as well.

Earlier, employer contribution to specified funds was taxable only if the contribution exceeded certain limits provided under the Act for a particular fund. However there was no upper limit for all specified funds combined which as per the Government gave undue tax benefit to employees in high salary brackets.

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Krishna Rath is a SEBI Registered Investment Adviser, and since 2015 has been educating netizens on investments and insurance. Krishna is a fee only SEBI RIA and is Odisha's first SEBI RIA. With background in IT, Krishna is changing the advisory space with new innovations in AdvisoryTech.

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