Finance Minister has stressed that Budget 2021-22 raises resources to push the economy without increased taxation.
However, one change proposed to the income tax law has caused concern for the salaried class.
What is the proposed change?
The Union Budget has proposed taxing the income on provident fund (PF) contributions of over Rs. 2.5 lakh a year.
The contributions are made on a voluntary basis.
The Bill has proposed withdrawing tax exemption on interest income accrued into PF accounts for contributions exceeding Rs.2.5 lakh ‘in a previous year in that fund,’ on or after April 1, 2021.
For contributions up to Rs.2.5 lakh a year into Employees’ Provident Fund, tax exemptions will remain along with guaranteed returns.
What is the rationale?
Some employees are contributing huge amounts into their PF accounts and getting tax-free incomes.
The exemption, without any threshold, benefits only those who can contribute a large amount to these funds as their share.
Thus, the Revenue Department has pointed out that the proposed tax would only affect a small group of ‘high net-worth individuals’ (HNIs).
What is the concern though?
A social security scheme for formal sector workers should not become an investment haven for the well-heeled corporate top brass.
However, the threshold proposed to exclude the so-called HNIs appears low.
This would end up partially taxing PF income for even those putting away Rs. 21,000 a month towards their retirement.
This is hardly a typical HNI, given the fact that it may take the saver decades to attain a one crore rupee PF balance.
The threshold also does not tie in with the Rs.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).
What are the other uncertainties?
There is tax treatment inequity between India’s limited retirement savings instruments.
But this aside, employees and employers also have some serious doubts on the implementation of the proposal.
The words ‘in a previous year’ suggest this will be a type of retro-active tax.
This would mean taxing future income even on past years’ contributions of over Rs.2.5 lakh.
It is also not clear when and how the tax is to be paid — at retirement or each year that the PF rate is announced.
The CBDT chief has said employees should include such income in their annual tax returns.
This may work for GPF (General Provident Fund) members whose interest rate is announced every quarter.
This would however be difficult for EPF accounts, as interest rates are declared late and credited even later.
The goal of targeting HNIs using the PF savings to avoid taxation is laudable.
But the Centre should consider recalibrating the arithmetic and operational details of this tax.
