Experts say that there are other practical difficulties, which the Income Tax Department has not mentioned while preparing the guidelines.
In the budget 2021, the government had announced a tax on interest on the contribution of more than Rs 2.5 lakhs annually to the Provident Fund (PF) of private sector employees from the new fiscal year. Earlier, the government had decided to tax the contribution of the employer in the retirement fund to more than 7.5 lakh rupees. Confusion has arisen due to this decision of the government. Experts say that there are other practical difficulties, which the Income Tax Department has not mentioned while preparing the guidelines.
In the previous year’s budget, Finance Minister Nirmala Sitharaman had set an upper limit of Rs 7.5 lakh for employer contribution to PF, National Pension System (NPS) and Superannuation Fund. The contribution of more than 7.5 lakh rupees in the account of the employee in a year has now come under the tax net. According to the news published in the Times of India, the income tax authorities took 13 months to prepare the rule and this came on March 5 this year, four weeks before the end of the financial year.
Now up to 5 lakhs interest tax free
On February 1, 2021, Finance Minister Nirmala Sitharaman announced in the budget of 2021-22 that tax will be levied on the interest of employees who contribute more than 2.5 lakh rupees annually in the PF of the new financial year. This did not include the contribution made by the employer. However, later the Finance Minister raised the tax free interest limit from 2.5 lakh rupees to 5 lakh rupees. Now, interest on the contribution of employees up to Rs. 5 lakhs in PF will not be taxed.
Employees and tax experts confuse
This decision of the government has confounded the employees as well as the tax practitioners. On one hand, an investment of Rs 5 lakh in a retirement fund is tax free. On the other hand, investment of more than 7.5 lakh rupees will be taxed. This will cause loss to the employees and they will have to bear the liabilities of tax assessment and payment.
Employees were required to pay tax by 31 March, but did not have an interest rate fix on the Employees Provident Fund (EPF) for this year, as the Labor Department is yet to notify the rate for 2020-21.
For example, it is possible that an employer can contribute 5 lakh rupees in PF and the same amount in NPS. A limit of up to 7.5 lakh rupees is fixed and how more can be allocated more than this.