Need for more clarity on taxable interest on employee’s contribution to PF

The much-awaited method of computing this interest was notified by the tax authorities on August 31.

The newly laid down rule requires the maintenance of separate accounts within PF for non-taxable contributions and taxable contributions. The non-taxable contribution shall be the aggregate of the closing balance of the account as on 31st March 2021 and the contributions made during the financial year and subsequent financial year to the prescribed limit and shall also include any interest earned on the above, but reduced by Any withdrawal(s). Taxable contribution will include contributions made during the year and subsequent financial year in excess of the prescribed limit and interest earned on the same which is deducted by withdrawal.

Though this notification has given some clarity, still there are some open questions.

An important aspect is this: what is the point of taxability? Will this interest be taxable at the time of crediting or crediting the account or at the time of withdrawal from PF account? What is the probability that PF officers will withhold taxes on such taxable portion, and at what time?

While clarity is awaited, persons following the business system of accounting on a regular, consistent basis, applying general principles, may have to offer interest to tax on accrual basis in the financial year in which it arises. it happens. Such persons have to keep an eye on the interest paid towards tax so that it is not doubled at the time of withdrawal.

Others who follow the cash system may argue that interest is to be taxed only if it is received on future withdrawals. Maintaining books of accounts can help to substantiate the method of account at the time of valuation.

Usually, the PF interest rate is declared and the interest is credited after the end of the tax year. Hence, it may present another challenge in ascertaining the interest credit to be considered for taxation.

One of the possible considerations is that the rate of interest as declared for the previous year may be considered and the credit of interest may be considered over and above the credit of interest while filing return or revised return.

Employees can choose to either declare the taxable interest portion to the employer, who will then consider the same for tax withholding purposes or pay tax on the same by way of advance tax or self-assessment tax at the time of filing . Return.

Employer-managed PF trusts may also face challenges. The responsibility for maintaining separate accounts for taxable and non-taxable contributions, and the tax withholding requirement, where applicable, will fall on the trust.

Budget 2021 and the recent notification seeks to limit the exemption given to employees earning an annual salary of more than approx. ₹40 lakhs (50% of the total salary assuming PF wages) and depositing huge amount in PF. It is clear that the intention is not to tax people in the lower employment income group. One will have to wait and see how it is administered.

Taapti Ghosh is a partner of Deloitte India.