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Employees’ Provident Fund (EPF)

Context:

In the Union Budget of 2021-22, Finance Minister introduced a new provision to tax income on provident fund contributions from employees beyond ₹2.5 lakh a year.

Relevance:

GS III- Indian Economy

Dimensions of the Article:

  1. About Employees’ Provident Fund
  2. About Employees’ Provident Fund Organisation (EPFO)
  3. Latest development on the PF tax
  4. At what rate will taxes be deducted from income on taxable contributions’ account?

About Employees’ Provident Fund:

  • An Employees’ Provident Fund (EPF) account is mandatory for formal sector workers earning up to ₹15,000 a month in firms with over 20 employees, as a means of ensuring retirement income.
  • An amount equivalent to 12% of the basic pay and dearness allowance paid to a worker is deducted as employees’ contribution to their accounts, with an equivalent amount remitted by the employer.
  • The EPF members are also allowed to voluntarily deploy more of their savings into the EPF account, an option many choose due to the need to build a larger nest egg for their sunset years and the reasonably healthy tax-free annual returns on the EPF.

About Employees’ Provident Fund Organisation (EPFO)

Nodal: Ministry of Labour & Employment

  • It is a government organization that manages provident fund and pension accounts of member employees and implements the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.
  • The Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 provides for the institution of provident funds for employees in factories and other establishments.
  • It is one of the World’s largest Social Security Organisations in terms of clientele and the volume of financial transactions undertaken.

Latest development on the PF tax:

  • Finance Minister introduced a new provision to tax income on provident fund contributions from employees beyond ₹2.5 lakh a year.
  • Tax provision also covers government employees, the contribution limit for tax-free income for them and any other PF accounts where employers do not contribute was set at ₹5 lakh per year.
  • On August 31, 2021, the Central Board of Direct Taxes (CBDT) notified rules to calculate the taxable income on PF contributions exceeding the specified limits, starting from the financial year 2021-22.
  • The rules require all PF accounts to be split into separate accounts —
    • the taxable contribution and interest earned on that component,
    • the non-taxable contribution that shall include the closing balance of the PF account as on March 31, 2021
    • all fresh non-taxable contributions and interest thereon.
  • The Employees’ Provident Fund Organisation (EPFO), in charge of managing most private sector employees’ retirement savings as well as regulating the operations of a few thousand companies that manage their PF trusts in-house
Reason for the introduction of PF tax:
  • The Finance Ministry had rationalised the tax move by arguing that the ₹2.5 lakh cap on contributions will cover about 93% of EPF members, and the tax-free, assured income was being milked by the super-rich and high net-worth individuals.
  • Many were contributing crores into their EPF accounts and earning several lakhs as annual income, thus misusing what is essentially a social security scheme, the Revenue Department pointed out.

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

  • As specified by the CBDT, the EPFO will maintain a non-taxable account for contributions up to ₹2.5 lakh a year, and a taxable account for members who contribute over that threshold.
  • Tax will be levied at 20% on such income for EPF members whose retirement savings accounts have not been linked to their Permanent Account Number (PAN), while the rate will be 10% for those who have linked their tax and EPF accounts.
  • The TDS rate has been pegged at 30% for non-resident employees with active EPF accounts in India, unless their countries of origin have a Double Taxation Avoidance Agreement (DTAA) with India.

-Source: The Hindu

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September 2022
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