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The story so far: In the Union Budget of 2021-22, Finance Minister Nirmala Sitharaman introduced a new provision to tax income on provident fund contributions from employees beyond ₹2.5 lakh a year. An Employees’ Provident Fund (EPF) account is mandatory for formal sector workers earning up to ₹15,000 a month in firms with over 20 employees, as a means of ensuring retirement income. An amount equivalent to 12% of the basic pay and dearness allowance paid to a worker is deducted as employees’ contribution to their accounts, with an equivalent amount remitted by the employer. The EPF members are also allowed to voluntarily deploy more of their savings into the EPF account, an option many choose due to the need to build a larger nest egg for their sunset years and the reasonably healthy tax-free annual returns on the EPF.
The Finance Ministry had rationalised the tax move by arguing that the ₹2.5 lakh cap on contributions will cover about 93% of EPF members, and the tax-free, assured income was being milked by the super-rich and high net-worth individuals. Many were contributing crores into their EPF accounts and earning several lakhs as annual income, thus misusing what is essentially a social security scheme, the Revenue Department pointed out. While the tax provision also covers government employees, the contribution limit for tax-free income for them and any other PF accounts where employers do not contribute was set at ₹5 lakh per year. On August 31, 2021, the Central Board of Direct Taxes (CBDT) notified rules to calculate the taxable income on PF contributions exceeding the specified limits, starting from the financial year 2021-22. The rules require all PF accounts to be split into separate accounts — one with the taxable contribution and interest earned on that component, and another with the non-taxable contribution that shall include the closing balance of the PF account as on March 31, 2021 and all fresh non-taxable contributions and interest thereon. The Employees’ Provident Fund Organisation (EPFO), in charge of managing most private sector employees’ retirement savings as well as regulating the operations of a few thousand companies that manage their PF trusts in-house, issued a circular on Wednesday to explain the operational details of the tax.
The 43-page communique, which some tax experts noted is unusually long, seeks to provide guidelines on how to compute the tax liability in different scenarios. “The circular is mostly for administrative purposes and explains how withholding taxes would be computed and deducted in various situations such as withdrawal of funds from the PF account during the year,” said Suresh Surana, RSM India founder, adding that it lays down norms for the tax to be deducted at source by the EPFO or company-run PF trusts.
As specified by the CBDT, the EPFO will maintain a non-taxable account for contributions up to ₹2.5 lakh a year, and a taxable account for members who contribute over that threshold. Tax will be levied at 20% on such income for EPF members whose retirement savings accounts have not been linked to their Permanent Account Number (PAN), while the rate will be 10% for those who have linked their tax and EPF accounts. “Thus, PF members should ascertain that their PF accounts are linked with PAN in order to avoid unnecessary blockage of funds by way of deduction of TDS at a higher rate,” Mr. Surana advised.
The TDS rate has been pegged at 30% for non-resident employees with active EPF accounts in India, unless their countries of origin have a Double Taxation Avoidance Agreement (DTAA) with India. According to Mr. Surana, this rate would be further increased by education cess and applicable surcharges.
While the EPFO or an employer will take care of the TDS levies, if your income tax slab rate is higher than the rate at which the TDS was undertaken, you will need to pay the differential rate at the time of filing your IT returns, pointed out Deloitte India partner Saraswathi Kasturirangan. Moreover, depending on how much you contribute beyond the ₹2.5 lakh limit and whether your EPF and PAN are linked, there is some trickier math for you to work out. “Section 194A of the IT Act provides TDS deduction at 10% on eligible PF interest, provided the interest payable in the entire year is ₹5,000 or more. Thus, no TDS would be deducted if the PF interest paid to the resident does not exceed ₹5,000,” said Mr. Surana. Where the tax liability on PF contributions’ income is ₹5,000 or less, the tax will have to be calculated by the employee at the time of filing their returns. For instance, an interest income of ₹50,000 or ₹25,000 from contributions over ₹2.5 lakh, attracting a levy of 10% or 20%, respectively, would fall within this ₹5,000 cap. This may cover a lot of EPF members voluntarily parking more than mandated savings. “Employees will certainly need to keep close tabs on this and include such income in their returns,” Ms. Kasturirangan emphasised. This provision of the Income Tax Act, however, does not apply on non-residents, pointed out Mr. Surana, noting that the TDS in such cases would have to be deducted on the entire PF income chargeable to tax.
