Tax on PF withdrawals

Introduction

The income tax law proposed in the Finance Bill, 2021, has triggered anxieties for the salaried class: withdrawing tax exemption on interest income accrued into Provident Fund accounts arising out of employee contributions exceeding 2.5 lakh ‘in a previous year in that fund,’ on or after April 1, 2021.

Issue

The rationale — some employees are contributing huge amounts into their PF accounts and getting tax-free incomes.

Views of the Revenue Department

The Revenue Department has pointed out the tax will only affect a small group of ‘high net-worth individuals’ (HNIs); the 100 largest employees’ PF (EPF) accounts had a combined balance of over ?2,000 crore.
It can be no one’s case that a social security scheme for formal sector workers should become an investment haven for the well-heeled corporate top brass.

Is there a flaw in the definition of HNI?

The threshold proposed to exclude the so-called HNIs appears low, as it would end up partially taxing PF income for even those putting away 21,000 a month towards their retirement — hardly a typical HNI given it may take the saver decades to attain a one crore rupee PF balance.
The threshold also does not tie in with the 7.5 lakh limit set in last year’s Budget for employers’ contributions into the EPF, National Pension System (NPS) or other superannuation funds (rules for which are yet to be notified).
This is not the first time this government had tried to tax PF savings, citing its abuse by the rich.
In the 2016-17 Budget, it proposed to tax 60% of EPF balances at the time of withdrawal, but backtracked after a backlash.
Now, it has covered even government employees’ contributions into the GPF, but left NPS investments over 2.5 lakh a year untouched.
Tax treatment inequity between India’s limited retirement savings instruments aside, employees and employers have some serious doubts on the implementation.

Retro-active tax

The words ‘in a previous year’, for one, suggest this will be a type of retro-active tax — taxing future income even on past years’ contributions of over 2.5 lakh.

Way ahead

Finally, this may not be smart timing for a government looking to lean on huge borrowings to dent large inflows into EPF — most of its corpus is captively deployed in government bonds.
While the goal of targeting HNIs using the PF savings to avoid taxation is laudable, the Centre should consider recalibrating the arithmetic and operational details of this tax.

Source: TH

Join Our Telegram

India’s road safety

Provident Funds to be Taxed at withdrawal- Budget 2020-21

Pradhan Mantri Suryodaya Yojana

06 Feb, 24
SHARE

Recently, Prime Minister announced Pradhan Mantri Suryodaya Yojana under which 1 crore households will get rooftop solar power systems. India’s Status of Current Solar Capacity India currently stands at 4th place globally in solar power capacity. As per Ministry of New an

Foreign Contribution Regulation Act (FCRA)- NGO

06 Feb, 24
SHARE

The Foreign Contribution Regulation Act, 2010 (FCRA) registration of two prominent non-governmental organisations (NGOs) — Centre for Policy Research (CPR) and World Vision India (WVI) have been cancelled this month. What is FCRA? Key provisions of FCRA, 2010 Key aspects Description

Voice clone-AI

06 Feb, 24
SHARE

Voice clone fraud has been on the rise in India. AI voice cloning – It is the process of creating a synthetic replica of a person’s voice through machine learning and speech synthesis technology.It is called as voice deepfakesor audio deepfakes. Objective – To achieve a high level of na

Science communication- how to promote

06 Feb, 24
SHARE

Steps taken by India to promote Science Communication Publications and Information Directorate (PID) - An organisation under Council of Science and Industrial Research (CSIR) established in 1951 for publishing and disseminating scientific information in India. National science magazines- The PI

Universal Basic Income (UBI)- Analysis

05 Feb, 24
SHARE

Universal Basic Income (UBI) can strengthen welfare architecture and unlock the nation’s latent demographic potential. UBI - It is an income support mechanism typically intended to reach all or a very large portion of the population regardless of their earnings or employment status. Objective- To provide enough to co