Budget move to tax PF contributions of over ₹2.5 lakh/year ‘raises retrospectivity questions’

The Budget proposal to tax provident fund contributions above ₹2.5 lakh per year has raised questions on how interest from past contributions above the limit would be treated.

Experts believe that interest accruing from April 1, 2021 on past contributions “in any previous year” above the threshold are also likely to be taxable.

“There is a slight retrospectivity in this amendment to the effect that even the interest accruing after April 2021 on contributions made in the past in excess of ₹2.5 lakh shall come under tax net,” said Neha Malhotra, Director, Nangia Andersen LLP.

“Interest accrued on employees’ contribution in excess of ₹2.5 lakh made in any previous year shall be liable to tax starting April 2021,” she pointed out.

Restricting tax exemption

Finance Minister Nirmala Sitharaman had in the Budget 2021-22 proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of ₹2.5 lakh. This would rationalise tax exemption for the income earned by high-income employees, she had said.

“This restriction shall be applicable only for the contribution made on or after April 1,”said the Budget document.

An email query by BusinessLine to the Central Board of Direct Taxes on the issue did not elicit a reply. “It is hoped that the Finance Ministry will clarify on the issue as there seems to be an element of retrospective taxation. The government will also have to clarify the method of deducting such tax,” said a senior tax expert, who did not want to be named.

Experts, however, pointed out that the amendment is targeted at the high salaried class.

“The proposed amendment shall not have a bearing on the middle-income group earning income up to ₹20.83 lakh (assuming that 12 per cent of the same is contributed to the Provident Fund). However, high-salaried individuals may be dragged into the tax net since their contribution may exceed ₹2.5 lakh,” Malhotra noted.

Method to be made clear

Sudhakar Sethuraman, Partner, Deloitte India, said the method of computing interest will be announced by the government in due course.

He also pointed out that the Finance Act, 2020 introduced a new provision to tax employer contribution exceeding ₹7.5 lakh towards Employees Provident Fund, National Pension Scheme and Superannuation in a financial year in aggregate including the annual accretions to the extent it relates to the employer contributions. “The annual accretion by way of interest during the FY to the balance at the credit of the fund may be treated as perquisite to the extent it relates to the employer’s contribution. The government has to prescribe the computation mechanism,” he said.

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