Budget 2022: What impact will it have on taxation and PF withdrawals?

Provident Fund (PF) has always been considered as one of the safest and tax-effective retiral benefit for employees. The employee contributes 12 per cent of their PF wages every month and the employer makes a matching contribution. Interest on the accumulated balance is credited by the Employees Provident Fund Organisation (EPFO) on an annual basis.

Taxability of PF Withdrawal

PF withdrawal is tax-exempt in the following specified circumstances:

1. Continuous services of 5 years or more, with one or more employers
2. Termination before completion of 5 years of service due to employee’s ill-health, discontinuance of the employer’s business and any situation beyond the control of the employee.
3. Transfer of entire PF accumulation to Recognized Provident Fund on cessation of employment or to National Pension Scheme (NPS) account.

Where an individual withdraws the accumulated balance in any other situations, example before completing five years continuous services, the amount would be considered taxable as under:

 

 

Newly introduced Tax provisions related to interest on PF

•  Taxability of employer contribution and interest thereon: Employer’s contribution to PF during the year in excess of Rs 7,50,000 and any interest credited on such excess contribution shall be considered as taxable as ‘perquisites’ forming part of income from salary.
•  Taxability of interest on employee contribution: Interest accrued in respect of employee’s contribution in excess of Rs 2,50,000 during a year would be considered taxable as income from other sources. This would apply even where the period of continuous service is more than 5 years or other conditions are met.

Expectations from Budget 2022 on Provident Fund-related provisions

•  The salaried taxpayers expect an increase in limits for deduction under section 80C from current limit of Rs 1,50,000 to at least Rs 2,50,000.
•  Clarification is expected on the mechanism for offering to tax the interest on employee contribution above Rs 250,000 during the year. The EPFO typically recommends the rate of interest before end of financial year but the same is notified many months later. Taxpayers may not be able to determine taxable interest to be included in the tax returns. Therefore, interest may be considered as taxable in the year in which the same is credited post notification of rate of interest by EPFO.

These measures could help employees reducing their tax liability to claim deductions other than EPF and would also ease the compliance for employees with respect to taxability of PF contribution/ interest thereon.

 

Views are personal. Chandna is partner, and Parashar is manager, Grant Thornton Bharat LLP.