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The Tale of ‘Sukhiram’, ‘Dukhiram’, ‘Sevakram’, ‘Gyaniram’ & the PF related Budget Amendment!!
This Article penned by our Founder Director Sh. Mayank Mohanka, FCA has been published in renowned website taxmann.com with the citation (2021) 124 taxmann.com 193 (Article). Knowledge is meant for sharing so this Article is being shared here for the benefit of our Readers.
1.2.2021
Yes, it was the Budget Day. Two close friends, ‘Sukhiram’ and ‘Dukhiram’ went out for a stroll in late evening.
Dukhiram – “Sukhi, why are you looking so ‘dukhi’ (upset)?”
Sukhiram – “Yes yaar, I have heard that the Govt. has now made the PF taxable in this Budget, so I will loose out on my tax-free savings now.”
Their Common Friend ‘Gyaniram’ who was listening to their talks from behind joined them and said, “No Sukhi, it is not like that. The Govt. has not made your PF taxable.”
Sukhiram- “Gyani, please tell me na yaar, what exactly is this budget amendment?”
Gyaniram – “Sukhi, as per the amendment, only in those cases where the employees’ annual PF contribution exceeds Rs. 2,50,000/-, the interest income earned on such excess contribution will now be taxable w.e.f. 1.4.2021.”
Sukhiram- “Which means that my (employee’s) principal contribution, employer’s contribution, entire interest earned on employers’ contribution and interest earned by me on my contribution of upto Rs 2.5 lakhs p.a. is still not taxable?”
Gyaniram- “Yes, exactly and your (employee’s) annual PF contribution of Rs 2.5 lakhs means a monthly contribution of Rs. 20,833/-. So only the interest earned by you on your monthly contribution in excess of Rs. 20,833/- will be taxable now.”
Their friend ‘Sevakram’, a Government employee, also joined them and asked Gyaniram, “Well Gyani, is my contribution to General Provident Fund (GPF) also covered in this budget amendment?”
Gyaniram- “Yes, Sevak, it is covered. Our CBDT Chairman has just clarified it on a news channel. So, now if your (employee’s) annual contribution to GPF exceeds Rs. 2.5 lakhs p.a. then interest earned by you on that excess contribution will be taxable w.e.f. 1.4.2021.”
Dukhiram- “Well Gyani, you were contributing in Public Provident Fund (PPF) na? So, what is the status there?”
Gyaniram- “The contribution to PPF is already restricted to Rs. 1.5 lakhs p.a. currently, so this amendment will not have any impact on my PPF contribution.”
Sevakram- “Well Gyani, since employee’s contribution is 12% of his basic salary plus DA, so a monthly contribution of Rs. 20,833/- means a basic salary of roughly around Rs 1.73 lakhs. Isn’t?”
Gyaniram- “Yes, Sevak, your calculations are correct to a certain extent but only if the employee is not contributing anything voluntarily in excess of his usual 12% contribution. But an employee can also contribute more than 12% of his basic salary plus DA, as his voluntary contribution in the Voluntary Provident Fund (VPF). There is no restriction to his contribution. Infact that is the main reason for bringing in this amendment. You all know that any interest earned by us on our PF contribution was totally exempt uptill now i.e. upto 31.3.2021. So, many high salary bracket individuals used to park their savings in the form of their voluntary PF contribution in excess of the 12% limit in VPF and earn tax free interest income on it. So, to restrict the amount of this tax-free income, the Govt. has brought in this amendment.”
Sukhiram- “Gyani, I am ‘sukhi’ now as this amendment will not impact me. One more thing. Is this threshold limit of employee’s annual PF contribution of Rs. 2.5 lakhs applicable to all PF funds like EPF, RPF, PPF, GPF and PPF individually or in aggregate?”
Gyaniram- “Sukhi, that’s a very good question. Let us understand this with an example. Suppose your annual contribution to your EPF is Rs 2 lakhs and your contribution to your PPF is 1.5 lakhs in FY 2021-22, or lets say, Sevak’s annual PF contribution in GPF is Rs 2 lakhs and PPF is Rs 1.5 lakhs.
So, your individual contribution in each of these funds is not in excess of Rs 2.5 lakhs but your combined contribution to EPF/GPF & PPF is Rs 3.5 lakhs which is in excess of Rs 2.5 lakhs. So, the question arises, will the interest income earned by you on your combined annual contribution to EPF/GPF and PPF in excess of Rs 2.5 lakhs i.e. Rs 1 lakh, be taxable?
Well, as per my understanding of the amended provision, the answer is ‘NO’ because of the usage of the expression “that fund” in the proposed amendment in section 10(11) and 10(12) of the Income-tax Act, which suggests that the now prescribed threshold limit of Rs 2.5 lakhs applies to the individual contributions to each such fund like EPF, RPF, GPF & PPF and not the aggregate or the combined employees’ contribution in all such funds. However, a further clarification from the Govt. in this regard is desirable so as to remove this ambiguity completely.
But yes, in our above example, if your annual contribution to EPF is Rs 2 lakhs and VPF is Rs 1 lakh, or say, Sevak’s annual contribution to GPF is 2 lakhs and VPF is Rs 1 lakh, then the interest income earned by you or Sevak on the excess contribution of Rs 50,000 will be taxable w.e.f. 1.4.2021.”
Dukhiram- “Gyani, what has been the rate of interest on these PF funds in all these years?”
Gyaniram- “Dukhi, the rate of interest on these PF funds has remained in the range of 8-9% p.a. in all these years.”
On hearing this, Dukhiram became very ‘Dukhi’ (upset).
Gyaniram- “Dukhi, now why you have become dukhi? Infact you were not contributing anything in such PF funds in all these years. So, the amendment in any case, is not having any impact on you.”
Dukhiram- “Well Gyani, this is the precise reason for me becoming dukhi. In all these years, an easy way of earning tax-free interest income and that too in the range of 8-9% was there in the statute itself and I was parking my savings in Bank FDs instead of such PF funds and Gyani you are responsible for this. You could have given this ‘GYAN’ of yours to me earlier. Now you would have to compensate for this loss of mine, with some hot samosas and jalebis.”
The Friends’ Stroll continued with Sounds of Laughter…….
