The EPFO and organisations that manage contributions of employees in-house are looking for information on issues such as the withholding tax liability and the timing of the taxation. There is also ambiguity on whether the taxable portion of interest is required to be offered to tax each year on an accrual basis or taxed lumpsum at the time of withdrawal of the corpus on retirement.
The budget for FY22 had made taxable the interest earned on employees’ contribution to provident funds in excess of ₹2.5 lakh a year. This requires splitting of accounts of those employees with an annual contribution in excess of ₹2.5 lakh beginning April 1, 2021. One account would house the exempt part of the contribution and the other the taxable portion in excess of ₹2.5 lakh.
The change was aimed at preventing high earners from getting an excessive advantage due to the tax-exempt status of PF.
If unaddressed, the issues regarding the changes could potentially lead to delay and confusion over tax computation from April 1, experts said, suggesting changes to the income tax law.
“This has not been expressly dealt with either in the amendment to Section 10 of the I-T Act or Rule 9D for computing the interest on taxable contributions. Hence, there is an ambiguity on timing of offering taxable interest income for tax,” said Sonu Iyer, tax partner and people advisory services leader at EY India.
The Central Board of Direct Taxes (CBDT) had issued a circular regarding the matter on September 1, but experts say more clarity is needed.
