Employees provident fund (EPF) will soon be taxable for those with high salaries

Employer's contribution for provident fund, NPS and superannuation worth more than 7.5 lakh a year will be taxable

The new income tax rules affects only those in a high salary bracket

Those with high salaries might soon have to shell out income tax on employers contribution under employees' provident fund (EPF), National Pension System (NPS) and superannuation fund. In the Union Budget 2020, finance minister Nirmala Sitharaman has introduced a cumulative upper ceiling of ₹7.5 lakh for the three investments which give tax benefits.

With effect from 1 April, 2021, the combined upper limit of ₹7.5 lakh in respect of employer's contribution in a year to NPS, superannuation fund and recognised provident fund and any excess contribution will be taxable. The Budget has also proposed that even interest and dividend earned during the previous year would also be taxable. Interest is treated as perquisite to the extent it relates to the employer’s contribution which is included in total income.

The new amendment will take effect from 1st April, 2021 and will apply from assessment year 2021-22.

For example, if an individual's basic salary is ₹30 lakh, aggregate amount of employer contribution could be:

PF employers contribution: 3.60 lakh

NPS: ₹3 lakh

Superannuation Fund: ₹1.50 lakh

Total investment: ₹8.10 lakh

The taxable amount could be ₹60,000.

Employer's contributions to PF and NPS were tax exempt so far without an amount specific ceiling. This meant that individuals with high amounts of basic salary could contribute 12% And 10% of basic salary without limit and avail tax exemption, Saraswathi Kasturirangan, Partner, Deloitte India, said.

"There is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer. This is giving undue benefit to employees earning high salary income," Budget documents say.

While an employee with low salary income is not able to let employer contribute a large part of his salary to all these three funds, employees with high salary income 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. "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," it says.