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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 (exempt- exempt- exempt) EEE category which means that there was no taxability at the time of contribution by employers, no taxability on accrual of interest and no taxability on withdrawal, subject to certain conditions. Similarly, NPS and SAF also were tax exempt subject to the provisions of the Act.

The Union budget 2020 introduced tax on contributions above 7.5 lakh and interest thereon, in a financial year, in respect of all the above three retiral schemes. The intention was to bring parity with the tax of high-paid employees who were able to design the salary packages in a way that a large part of the salary was paid by the employer in these tax exempt funds.

Accordingly, the definition of term perquisites was amended to include contribution to the EPF, NPS and SAF exceeding 7.5 lakh in a financial year as a taxable perquisite. This is a cumulative limit in respect of all the three funds. Further, the annual accretion in the form of interest, dividend or any other amount on such contributions exceeding 7.5 lakh are also taxed as perquisite.

These provisions have taken away the EEE status of the retiral schemes for highly paid employees. Not only that, in certain situations, these may also result in double taxation in the hands of the employee. The withdrawal from recognized Provident fund is exempt from tax only when the employee withdraws after 5 years of continuous service or withdrawal is done on events of death / incapacity or the funds are transferred to another employer registered with EPF. In case any employee withdraws EPF before 5 years then the accumulated balance is subject to tax. Now if the contribution had exceeded 7.5 lakh in the year of contribution, then the excess amount, which was already considered as perquisite in the year of contribution will be taxed again at the time of withdrawal. Similarly, the interest on contribution over 7.5 lakh which was subject to taxation in the year of accrual of interest is also subject to double taxation at the time of withdrawal.

Also, the employer’s contribution to EPF is exempt only to the extent of 12% of the salary. In case any employer contributes any amount towards EPF in excess of 12%, then the excess is also subject to tax. This will also result in double taxation where the total amount of contributions exceeds 7.5 lakh. Similarly, in case of NPS, the employer’s contribution upto 10% of salary is exempt from tax. Any contribution over this 10% was anyway subject to tax. This excess amount may fall into 7.5 lakh bracket and may be taxed again.

To provide retirement benefits, many employers contribute to the SAF. This contribution has also been covered in this cumulative limit of 7.5 lakh. The withdrawal from SAF is exempt from tax only if the withdrawal is done in specific situations like death or retirement or on becoming incapacitated or transfer to NPS. In case SAF is withdrawn before retirement at the time of changing jobs, the same is subject to taxation. This again may lead to double taxation of the component in excess of 7.5 lakh which has already been subject to tax as perquisite in the year of contribution.

This double taxation scenario puts a financial strain on the retirement corpus of the individuals. Till the time any clarifications are issued by the government, the individuals should carefully review their status to check whether their personal circumstances are resulting in any double taxation scenario. If so, an option of claiming income tax refund on the income doubly taxed earlier can be explored as the legislation does not intend to tax same income twice. However, this would have its own issues.

The tax authorities at lower levels might challenge the position and the relief can be expected only at the higher levels.

It was expected that the government will address these issues but no clarifications were incorporated in the Union budget 2023. Guess we will have to wait for some more time.

Rupali Singhania is FCA and partner, Areete Consultants LLP.

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