Tax on Interest on EPF Contribution exceeding Rs 2.5 Lakh

 Tax on Interest on EPF Contribution exceeding Rs 2.5 Lakh  Tax on Interest on EPF Contribution exceeding Rs 2.5 Lakh
Feb 212021
 

Tax on Interest on EPF Contribution exceeding Rs 2.5 Lakh

EPF/GPF Taxation

“No retro taxation on interest earned for EPF/GPF contributions of over Rs 2.5 Lakh

Crux:-

Interest of more than Rs 2.5 Lakh earned annually from contribution to Employees Provident fund (EPF) or Government Provident Fund (GPF) will not be taxed retrospectively, Expenditure Secretary TV Somanathan clarified.

Announcement was made at

Business Line webinar on “Decoding the Budget 2021-22”

The webinar was powered by HDFC Bank with BSE as as assosciate sponsor.

EPF Taxation

EPF is the only saving instrument where one gets tax emption at the time of contribution, then on the accumulation and, finally, at the time of withdrawal. This is called EEE (Exempt-Exempt-Exempt) mechanism.

Present Provisions

Presently, any payment received by an employee from his provident fund account is fully tax free. The payment received from the provident fund comprises of contribution made by the employer and the employee as well as the interest accrued on the contributions.

An employee is required to contribute 12% of his basic salary and dearness allowance towards employee provident fund account which is required to be matched by the employer by equal contribution. There is no such restriction on the employee contributing beyond 12% as voluntary contribution.

Proposal

Since the interest on contribution made by an employee enjoys tax exemption without there being any upper limit,  the government has proposed that interest accrued in respect of employee’s  contribution in excess of Rs. 2.50 lakhs every year shall become taxable in the hands of the employee at normal rate. This will apply to the Employees Contribution and not that of the employer.

This will be effective on contributions made from April 1 2021, So the interest in respect of annual contribution of Rs. 2.50 lakhs only will come tax-free and any interest accrued on excess contribution shall become taxable in the hands of the employee year after year.

Additional Info – Exemption

  • GPF & EPF flows into an account above Rs 2.5 Lakh will be directed to a separate sub-account.
  • The primary account including your past balance as on March 31, 2021 will always remain tax free;
  • Interest will also not have to be declared.
  • PPF, EPF, VPF, Ulips are some of the Popular Tax Free Investment Option available to Investors.

However, the proposal may not face as big a backlash this time because it affects only the creamy layer of salaried employees. The Rs 2.5 lakh annual threshold means that a person contributing up to Rs 20,833 a month to PF (basic salary of up to Rs 1.73 lakh a month) will escape the tax. This means if your Monthly basic salary is above Rs 1.75 Lakh (just the basic salary and not your total monthly income), your monthly contribution will be above Rs 20835 which is Rs 2.5 lakh in a year, then the interest income earned on the exceeded amount is taxable.

For example, for someone with a Basic Salary of Rs 1 lakh, the monthly contribution is Rs 12,000 which is about Rs 1.44 lakh in a year. The employee contributes an additional 12 per cent into VPF taking the total contribution to Rs 2.88 lakh in the year. In such a case, the interest earned on Rs 38,000 (excess of Rs 2.50 lakh) will now get taxed.

The new PF contribution rules will not impact an employee whose monthly contribution is below Rs 20,833. However, if your Basic Salary is above Rs 1.75 lakh, there’s no escaping tax on interest earned.

In my opinion, since we do not have social security system in our country why should the government discourage anyone from contributing higher amount towards his retirement fund. The government should rethink on this proposal.

Thanks for Reading!!!!

Esha Agrawal
The author can be reached at eshaag6@gmail.com, for any queries feel free to contact.

 

Is factory under construction or under liquidation is also covered under EPF

 Is factory under construction or under liquidation is also covered under EPF  Uncategorized
Oct 132016
 

THE EMPLOYEES’ PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952

Section 1. Short title, extent and application.-

(1) This Act may be called the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952.

(2) It extends to the whole of India except the State of Jammu and Kashmir.

(3) Subject to the provisions contained in section 16, it applies –

(a) To every establishment which is a factory engaged in any industry specified in Schedule I and in which twenty or more persons are employed and

(b) To any other establishment employing twenty or more persons or class of such establishments which the Central Government may, by notification in the Official Gazette, specify, in this behalf:

Provided that the Central Government may, after giving not less than two months‟ notice of its intention so to do, by notification in the Official Gazette, apply the provisions of this Act to any establishment employing such number of persons less than twenty as may be specified in the notification.

(4) Notwithstanding anything contained in sub-section 3 of this section or-sub-section 1 of section16, where it appears to the Central Provident Fund Commissioner, whether on an application made to him in this behalf or otherwise, that the employer and the majority of employees in relation to any establishment have agreed that the provisions of this Act should be made applicable to the establishment, he may, by notification in the Official Gazette, apply the provisions of this Act to that establishment on and from the date of such agreement or from any subsequent date specified in such agreement.

(5) An establishment to which this Act applies shall continue to be governed by this Act notwithstanding that the number of persons employed therein at any time falls below twenty.

From the above it can be said that Employees Provident fund is applicable to three types of establishment:

Situation 1:

Where the company is in the process of winding up an official liquidator has been appointed:

When the company is in the process of winding up and official liquidator has been appointed, the provident fund contribution need not to be deposited for a few employees who have been retained by the liquidator.

The court in the case of Regional Provident Fund Commissioners v Rohatas Industries Limited, observed that it is not in dispute that:

  1. Different units of the Company have been out of operation.
  2. These units were closed since a long time.
  3. They were not running at all at present.

The establishment was in the process of winding up and not engaged in any industrial activity specified in Schedule 1 nor specially notified under section 1(3)(b) of the act. Hence, in such circumstances establishment is not covered under EPF and hence contributions need not to be deposited.

Situation 2:

Will a factory or establishment be covered under the EPF Act when the construction activity has started and there are more than 20 workers?

The above analogy may be applied in the present case also. Since the specified activities are in the process of establishing the factory which is yet to come into existence and start operations. It does not meet the specification stipulated in section 1(3)(a). Hence, if the establishment is not notified under section 1(3)(b) the statutory requirement for applicability of the act provision is not fulfilled. Hence, no liability arises.

Conclusion

Hence, from the above discussion it can be safely concluded that a factory needs to deposited contribution only when in is working under normal operations. Contribution for construction period and post liquidation needs not to be deposited.