Union Budget 2021: Need clarity on ambiguities and issues related to tax deduction on employer’s contribution to social security funds

Considering the financial slowdown and so as to increase the consumption, modifications aimed toward rising the take residence wage of taxpayers can be a welcome transfer by the federal government.

Indian Union Budget 2021-22: Broadly in India, there are three kinds of social safety contributions – Provident Fund, Superannuation Fund and National Pension System – made by employer which give retirals advantages to staff and assist them in managing their post-retirement bills. Provident Fund (PF) is ruled by the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act). Similarly, the contribution to Superannuation Fund (SF) is ruled by the provisions of the Employees Superannuation Fund Act whereas contribution to the National Pension System (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

While the contribution to PF is necessary for sure class of staff, nonetheless, the contribution to SF and NPS is just not necessary on employer’s half and could also be supplied as an extra profit to worker on voluntary foundation. Also, below SF, solely employer is required to contribute, and worker can’t be compelled to make any contribution.

Regarding tax implications of assorted social safety contributions made by the employer, the home tax legislation supplies tax exemption/deduction on employer’s contribution to these funds up to specified limits. The limits for such tax exemption /eligible deductions are mentioned beneath:

*Any contribution to PF or SF over and above these limits is taxable within the palms of staff as wage on which employer is required to deduct taxes on the relevant slab charges. Any contribution to NPS over and above this restrict is just not allowed as deduction.

The Budget 2020 modification gave rise to sure ambiguities when it comes to precise implementation and related nuances. Now, with Budget 2021, it’s anticipated from the federal government that moreover asserting the Covid-related reduction measures, sure persisting ambiguities and issues (as mentioned beneath) be additionally clarified.

Ambiguity between the PF legislation and the Income-Tax legislation whereas computing PF contribution

As per the prevailing PF legislation, an employer is required to contribute 12% of wage of worker as PF contribution. The ‘salary’ contains primary wages, dearness allowance (DA) and retaining allowance (if any) and money worth of meals concession. Further, it additionally contains the allowances which aren’t variable in nature and paid to all staff on uniform foundation (as dominated by the Apex Court additionally). Contrary to this, as per the home tax legislation, wage for the aim of tax deduction on PF contribution contains solely DA and excludes all different allowances. Hence, there exists an incompatibility between the definition of wage whereas computing PF below the EPF Act and figuring out PF deductibility below the Income-tax legislation. Hence, it is strongly recommended to align the definition of wage for PF contribution each below EPF Act and Income-Tax legislation to keep away from any future litigation.

The above modification within the legislation also needs to be made contemplating the newly-introduced social safety code the place the definition of ‘wages’ for the needs of computation of PF contribution has been considerably modified. The new definition of ‘wages’ is anticipated to enhance the PF contribution and therefore, it’s the want of the hour to align the definition of income-tax legislation with PF legislation in order that there isn’t any undesirable hardship and litigation round declare of PF deduction in future.

Taxability of extra contributions to Social Security Funds – Amendment by Budget 2020

As mentioned above, the Budget 2020 got here up with modification in provisions of Income-tax legislation as per which any extra contribution to PF, SF and NPS fund, which in combination exceeds INR 7,50,000, might be taxable in worker’s palms as perquisites. In different phrases, the general tax profit for employer’s contribution to these funds was restricted to INR 7,50,000. Also, any annual accretions by means of dividend/curiosity on such taxable contributions have been additionally made taxable as wage. Post this modification, industries have raised many considerations and have some questions as beneath:

# The industries are awaiting a mechanism by way of which the main points of taxable annual accretion (i.e. dividend or curiosity) is required to be shared by the respective funds on a month-to-month/ annual foundation in order that the Employer could take into account the suitable perquisite worth whereas withholding taxes on wage.

# It can also be instructed that the style/ chronology of allocating taxable contribution in extra of INR 7.5 lakh between the three schemes be specified. This is required since fee of annual accretion is totally different in all of the schemes.

Hence, it’s instructed to concern additional clarifications on this side to carry clarity and keep away from any inadvertent non-compliance on employer’s half.

Apart from the above particular modifications, it’s also anticipated that the federal government would announce additional reduction measures to deal with the losses suffered by companies from Covid-19. Earlier in the course of the pandemic, the federal government introduced a number of reduction measures when it comes to lowered /forgone PF contributions, rest in PF related compliances, permitting partial withdrawal of PF and so forth. for the advantage of staff and employers each. The authorities had additionally borne the PF contributions for the interval from March to May 2020, for the staff drawing wages beneath INR 15,000 within the institutions using up to 100 staff the place 90% of them are drawing wages beneath INR 15,000. However, because the pandemic is just not but over and companies are nonetheless recovering, related advantages are anticipated within the upcoming finances to combat the Covid-19 pandemic in an efficient approach.

Towards this finish, the Ministry of Labour and Employment has additionally instructed to lower the speed of contributions for each employers and staff. Considering the financial slowdown and so as to increase the consumption, modifications aimed toward rising the take residence wage of taxpayers can be a welcome transfer by the federal government.

(By Akhil Chandna, Associate Partner, Grant Thornton Bharat LLP)

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