Finance minister Nirmala Sitharaman had announced in the Budget that employee contributions to the Employees’ Provident Fund (EPF) over Rs.2.5 lakh a year would be taxable from April 1.
The move is set to impact people with high incomes and high contributions to EPF, but the government has argued that it will affect less than 1% of contributors.
The Central Board of Direct Taxes (CBDT) chairman Pramod Chandra Mody said that the Budget provision that makes interest on employee contributions exceeding Rs.2.5 lakh a year to the Employees’ Provident Fund (EPF) taxable will also be applicable to all government employees covered by the General Provident Fund (GPF).
Mr. Mody while answering the query how the taxation proposal would be implemented at the time of retirement or withdrawal from the PF account, or by deducting tax at the time of crediting interest, said that though PF account holders may have the option to withdraw or not, the determination of the tax was very clear.
“Everybody is covered, even GPF. This is also applicable to government officials, including me. The law is equal for everybody,” Mody said.
As per the Central Board of Direct Taxes chairman, the new provision, which will be applicable for contributions made from April 1, 2021, would not affect most provident fund subscribers.
“If we see the total number of beneficiaries in this [PF] segment, then most of them are within the Rs.2.5 lakh limit. Only a small section of taxpayers makes annual contributions above Rs.2.5 lakh,” he said.
“The interest portion is calculable on a year-to-year basis, and that will go on an accrual basis, so that is taxable on your calculations in that particular year. If I am contributing into the GPF, I know how much interest I have received that year. That should be brought to tax in that very year. That is very simple, it’s just like bank interest,” he added.
“So, at the time of filing tax returns, you have to factor in the interest which you are receiving on that. For you and me, it is the same. It is for both the government employee and private sector employees,” Mr. Mody said.
The Contributions to EPF above Rs.2.5 lakh a year will be kept in a separate basket and taxed in a similar way as fixed deposits, without any double taxation, said Kamlesh Varshney, joint secretary, tax policy division at the CBDT.
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