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Employers’ PF contribution tax norm creates confusion

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(This story initially appeared in on Apr 05, 2021)

New Delhi: Earlier than deciding to tax curiosity earned by personal sector workers contributing over Rs 2.5 lakh in direction of provident fund from April 2021, the federal government had determined to convey employers’ contribution of over Rs 7.5 lakh in direction of retirement financial savings into the tax internet final 12 months.

Within the earlier 12 months’s Price range, finance minister Nirmala Sitharaman had determined to tax employers’ contributions to provident fund, Nationwide Pension System (NPS) and permitted superannuation funds in extra of Rs 7.5 lakh yearly as a perquisite within the fingers of workers, other than the annual accretion on the “extra contribution”.

To start with, the earnings tax officers in North Block took 13 months to prepared the rule, which got here on March 5 this 12 months — lower than 4 weeks earlier than the shut of the fiscal 12 months. On condition that the foundations had been complicated (some additionally name it impractical) workers and tax practitioners had been left with little time to sort out the issues. Workers bear the liabilities of tax estimation and funds.

Whereas workers had been to pay tax by March 31, they didn’t have the rate of interest on Workers Provident Fund (EPF) for the 12 months out there with them because the labour division is but to inform the speed for 2020-21.

There are issues with NPS returns too. “It isn’t possible to calculate the worth of accretions for NAV based mostly funds like NPS, that are market-linked. In such circumstances, standards for calculation must be particularly addressed by the tax division,” mentioned Amarpal Chadha, tax companion and India mobility chief at consulting agency EY.

“This will pose a sensible problem because the perquisite worth computation will solely be potential as soon as the closing steadiness within the funds is made out there (which is prone to be out there solely after March) and any tax to be withheld from workers will have to be factored within the payroll course of for March itself,” added Gautam Mehra, companion at PwC India.

A method out may very well be for workers to settle the taxes via the self-assessment mechanism. “We should always not have a look at taxing the annual accretion to NPS except it’s truly paid out. If after contemplating the notional good points, there’s a loss in future years, the person ought to be allowed to set-off such loss with the earnings,” mentioned Mehra.

There are different sensible difficulties, which the earnings tax division has not factored in whereas getting ready the rules. “There’s an ambiguity on which fund ought to be picked for extra contribution, whether or not the system is to be utilized to every fund on particular person foundation or all of the funds on combination foundation,” mentioned EY’s Chadha.

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