Employees’ Provident Fund (EPF), National Pension Scheme (NPS) and Superannuation Fund (SAF) find a prominent place in the retirement corpus of salaried individuals. Earlier, EPF had always been under the (exempt-exempt-exempt) EEE category, which meant that there was no tax at the time of contribution by employers, no tax on interest accrual and no tax on withdrawal, something under conditions. Similarly, NPS and SAF were also tax free subject to the provisions of the Act.
Union Budget 2020 introduced tax on above contribution 7.5 lakh in a financial year in respect of the above three retirement plans and interest thereon. The intention was to bring parity with the tax of higher paid employees who were able to design salary packages in such a way that a substantial portion of the salary was paid by the employer into these tax exempt funds.
Accordingly, the definition of the term perquisite was amended to include contribution over and above EPF, NPS and SAF. 7.5 lakh in a financial year as taxable perquisite. This is a cumulative limit in respect of all the three funds. Further, the annual accretion by way of interest, dividend or any other sum on such contribution 7.5 lakh is also taxed as perquisite.
These provisions have taken away the EEE status of retirement plans for highly paid employees. Not only this, in certain situations, these may also result in double taxation in the hands of the employee. Withdrawals from recognized provident funds are exempt from tax only if the withdrawal is made after 5 years of continuous service by the employee or in case of death/disability or the money is transferred to another employer registered with EPF. If an employee withdraws EPF before 5 years then the accumulated balance is subject to tax. Now if the contribution was exceeded 7.5 lakh in the year of contribution, then the excess amount, which was already treated as perquisite in the year of contribution, will be taxed again at the time of withdrawal. Similarly, the interest on contribution is over 7.5 lakh which was subject to taxation in the year of earning the interest is also subject to double taxation at the time of withdrawal.
Also, the employer’s contribution to EPF is exempt only up to 12% of the salary. If an employer contributes any amount to EPF in excess of 12%, the excess is also subject to tax. This will also result in double taxation where the total amount of contribution exceeds 7.5 lakhs. Similarly, in case of NPS, the employer’s contribution up to 10% of the salary is exempt from tax. Any contribution in excess of this 10% was subject to tax anyway. This excess amount may fall 7.5 lakh bracket and may be taxed again.
To provide retirement benefits, many employers contribute to the SAF. Also included in this cumulative limit on contributions are 7.5 lakhs. Withdrawals from SAF are exempt from tax only if the withdrawal is made on specified conditions like death or retirement or becoming disabled or shifting to NPS. If SAF is withdrawn before retirement while changing jobs, it is subject to taxation. This again may lead to double taxation of the excess component. 7.5 lakh which is already subject to tax as perquisite in the year of contribution.
This double taxation scenario puts financial strain on the retirement funds of individuals. Until a clarification is issued by the Government, individuals should carefully review their situation to check whether their individual circumstances do not result in a double taxation scenario. If so, the option of claiming income tax refund on the income already taxed twice can be explored as the law does not intend to tax the same income twice. However, this would have its own issues.
Tax officials at lower levels can challenge the status quo and relief can be expected only at higher levels.
It was expected that the government would address these issues but no clarification was included in the Union Budget 2023. Looks like we’ll have to wait for some more time.
Rupali Singhania is a partner at FCA and Ariete Consultants LLP.
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