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:
- About Employees’ Provident Fund
- About Employees’ Provident Fund Organisation (EPFO)
- Latest development on the PF tax
- 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
