In Budget 2021, the Government proposed to tax income on Provident Fund (PF) contributions above Rs 2.5 lakh in a year. This limit was further increased to Rs 5 lakh for PF accounts having no contribution from employers. According to the Institute of Chartered Accountants of India (ICAI), this limit is harsh for EPF accountholders planning their own retirement and contributing to PF to maximise their savings.
The ICAI has, hence, proposed that in the upcoming Budget 2022-23, the Government should raise the Rs 2.5/5 lakh limit to at least Rs 7.5 lakh.
The Finance Act 2021 amended sections 10(11) and 10(12) of the Income Tax Act to make interest income accrued during the previous year taxable if the contribution by the person exceeded Rs. 2,50,000/5,00,000 on or after April 01, 2021.
“It is suggested that proposed limit of Rs 2,50,000 in section 10(11) and section 10(12) of the Act may be reconsidered and may be raised suitably,” ICAI said in its Pre-Budget 2022 memorandum.
The issue
The ICAI noted that the Contribution limit of Rs. 2.5/5 lakh appears to be on the lower side. It said that in most cases, interest on employee contributions within 12% of basic salary will become taxable if this proposal is implemented.
“The limit may be reconsidered and maybe hiked appropriately say at least 12% of basic salary or Rs 5 Lakh whichever is higher to protect retirement corpus of genuine middle-class taxpayers to cater in absence of any social security scheme in place,” the memorandum suggested.
It further said that the current proposal to levy Income tax on so much of the interest as is attributable to the amount deposited in excess of Rs. 2.5/5 lakh during any of the previous years appears to be harsh on those who plan their retirement themselves by putting in their savings into PF.
The memorandum further pointed out that the legislative intent was to prevent the exemption being enjoyed by the ultra-rich who are able to deposit Rs 1 crore per month in PF, however, the limit of Rs 2.5/5 lakh may affect honest middle-class salaried assessees and especially salaried class who may be safely depositing a major chunk of their savings every year to secure their retirement.
Suggesting the Government to reconsider last year’s proposal, ICAI said, “It is well known and duly acknowledged by the government that honest Middle Class Salaried assessees are depositing their hard-earned money into PF in order to accumulate a retirement corpus. Government may consider fixing higher limit that enables a middle-class salaried person to build its retirement corpus and also restrict people from taking undue advantage of EEE scheme.”
“The limit may be raised to at least Rs 7,50,000 in line with the overall exemption limit in respect to employer’s contribution to PF and other funds,” it added.
Alternate option
The ICAI further said that as an alternative to the above proposal, the Government may increase the PPF contribution limit of Rs.1.50 lakh per person per year so that benefit is available to all sections of society. With this step, “the Government would also have a good long term source of funds. Considering inflation and need for social security for people when they are aged, the limit may be increased further as deemed suitable.”
The PPF contribution limit was raised from Rs 1 lakh to Rs 1.5 lakh in 2014. However, considering inflation and need for social security for people when they are aged, the limit may be increased further, ICAI recommended.
Source: financialexpress.com
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