New tax details on Employees’ Provident Fund income

the story So Far: In the Union Budget for 2021-22, Finance Minister Nirmala Sitharaman introduced a new provision for tax income on provident fund contributions above Rs 2.5 lakh annually from employees. An Employees’ Provident Fund (EPF) account is mandatory for formal sector workers earning up to ₹15,000 per month in firms with more than 20 employees, as a means of ensuring retirement income. An amount equal to 12% of Basic Pay and Dearness Allowance paid to an employee is deducted as contribution of employees to their accounts, with the same amount remitted by the employer. EPF members are allowed to voluntarily put a higher portion of their savings in an EPF account, an option that many opt for due to the need to build a bigger nest for their sunset years and a reasonably healthy tax-free annual return on EPF. Huh.

What is the latest development on PF tax that was introduced last year?

The finance ministry had rationalized the tax move, arguing that the ₹2.5 lakh limit on contributions would cover around 93% of EPF members, and allow tax-free, assured income to be provided by the super-rich and high net-worth individuals. Milk was being given. The revenue department pointed out that many people were contributing crores to their EPF accounts and earning several lakhs as annual income, thus essentially misusing a social security scheme. While the tax provision also covers government employees, the contribution limit for tax-free income for them and any other PF account where employers do not contribute was fixed at ₹5 lakh per year. On August 31, 2021, the Central Board of Direct Taxes (CBDT) notified the rules for computing taxable income on PF contributions over and above the specified limit, starting from the financial year 2021-22. The rules require all PF accounts to be bifurcated into separate accounts – one with taxable contribution and interest earned on that component, and the other with non-taxable contribution including closure of PF account by March 31, 2021 The balance will be inclusive of all new non-taxable contributions plus interest thereon. The Employees’ Provident Fund Organization (EPFO), to regulate the operations of a few thousand companies managing retirement savings of most private sector employees as well as managing their PF trusts, on Wednesday issued a circular to explain the operations be released. Tax details.

How will this new tax provision be applicable for EPF account holders?

The 43-page release, which is noted by some tax experts, is unusually long, attempting to provide guidelines on how to calculate tax liability in various scenarios. Suresh Surana, Founder, RSM India said, “The circular is mostly for administrative purposes and explains how withholding tax will be calculated and deducted in various situations, such as withdrawal of funds from PF account during the year.” Tax will be deducted at source by EPFO ​​or company run PF trust.

At what rate taxes will be deducted from income on taxable contribution account?

As specified by the CBDT, the EPFO ​​will maintain a non-taxable account for contributions up to ₹ 2.5 lakh in a year, and a taxable account for members contributing above that limit. 20% tax will be levied on such income for EPF members whose retirement savings accounts are not linked to their Permanent Account Number (PAN), while the rate will be 10% for those who have linked their tax and EPF accounts. “Thus, PF members should ensure that their PF accounts are linked with PAN so as to avoid unnecessary blockage of funds by way of deduction of TDS at higher rate,” advised Mr. Surana.

The TDS rate for non-resident employees with EPF accounts operating in India is pegged at 30%, unless their countries of origin have a Double Taxation Avoidance Agreement (DTAA) with India. According to Mr. Surana, this rate will be further enhanced by education cess and applicable surcharge.

How will it be included in the income tax return this year?

While the EPFO ​​or an employer will take care of the TDS levy, if your income tax slab rate is higher than the TDS rate, you will have to pay the difference rate while filing your IT return. Deloitte India partner Saraswati Kasturirangan was dismissed. Also, there is some tricky math for you to work out, depending on how much you contribute over the ₹2.5 lakh limit and whether your EPF and PAN are linked. “Section 194A of the IT Act provides for TDS deduction at 10% on eligible PF interest, provided the interest payable in the entire year is ₹5,000 or more. Thus, if the PF interest paid to the resident does not exceed ₹5,000, no TDS will be deducted,” Mr. Surana said. Where the tax liability on the income of PF contribution is ₹5,000 or less, the tax has to be calculated by the employee at the time of filing the return. For example, interest income of ₹50,000 or ₹25,000 from contributions above ₹2.5 lakh would fall within this ₹5,000 limit, attracting a levy of 10% or 20%, respectively. In this, many EPF members can voluntarily do parking in excess of the mandatory savings. “Employees will definitely need to keep a close watch on this and include such income in their returns,” Ms. Kasturirangan stressed. This provision of the Income Tax Act, however, does not apply to non-residents, Mr Surana said, noting that in such cases TDS will have to be deducted on PF income chargeable to tax.