From the next financial year, high-income earners will have to pay income tax for their contribution to the provident fund, superannuation fund and National Pension Scheme (NPS). The Union Budget for 2020-21 has proposed a combined cap of Rs 7.5 lakh for the employer’s contribution to these three categories of payouts, with the amount over and above this to be taxed in the hands of the employees.
The government in the Budget documents reasoned that those with higher salaries are able to design their salary package in a manner where a large part of their salary is paid by the employer in these three funds, while an employee with low salary income is not able to let the employer contribute a large part of his salary to all these three funds.
“Thus, this portion of salary does not suffer taxation at any point of time, since Exempt-Exempt-Exempt (EEE) regime is followed for these three funds. Thus, not having a combined upper cap is iniquitous and hence, not desirable. Therefore, it is proposed to provide a combined upper limit of seven lakh and fifty thousand rupee in respect of employer’s contribution in a year to NPS, superannuation fund and recognised provident fund and any excess contribution is proposed to be taxable,” the Budget said.
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Experts said this move though may not make sense from the taxation perspective in times of salary packages designed as cost-to-company (CTC), the move may nudge smaller and medium-sized companies to offer provident fund coverage to lower income employees.
At present, there is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer. The contribution by the employer to the account of an employee in a recognised provident fund over and above 12 per cent of the salary is taxable. Also, any contribution to an approved superannuation fund by the employer over Rs 1.5 lakh is treated as perks in the hands of the employee. Similarly, the assessee is allowed a deduction under National Pension Scheme (NPS) for 14 per cent of the salary contributed by the central government and 10 per cent of the salary contributed by any other employer.
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The Budget documents said the amendment will be effective April 1, adding that any annual accretion through interest, dividend or any other similar amount during the previous year to the balance of the fund or scheme may be treated as perk, by treating it as part of the employer’s contribution.
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