Budget 2023 income tax: Did you know that your Provident Fund or PF can be “double-taxed” under certain conditions? In a pre-Budget 2023 interview with TOI, Poorva Prakash, Partner, Deloitte India, says that amendments on the taxability of Provident Fund, brought in by the Finance Act 2020, could lead to certain situations of double taxation.
Poorva goes on to explain that Budget 2020 provided that an employer’s contribution to the Recognised Provident Fund (RPF), superannuation fund and National Pension System (NPS) exceeding Rs 7.5 lakh in a tax year, will be taxable in the year of contribution.
Also, accretion by way of interest, dividend or any other amount of similar nature on contributions made by the employer in excess of Rs 7.5 lakh will be taxable in the year of contribution.
“The Income Tax Act provides certain situations, where the PF contribution may become taxable if certain conditions are not met, for e.g. if the employee leaves before 5 years of service,” says Poorva. She points out that it could lead to double taxation at the withdrawal stage to the extent the contribution/accretion has already been taxed, as there is no specific exemption provided for excluding the contribution/accretion already taxed.
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This can be explained better with the help of an example:
- Employer’s contribution to Provident Fund or PF in FY 22-23 (A): Rs 900,000
- Taxable amount of Employer’s contribution to PF (exceeding Rs 7.5 lakh) at contribution stage i.e. in FY 22-23 (B): Rs 150,000 (Rs 900,000 – Rs 750,000) + accretion i.e. interest on employer’s contribution to PF of Rs 150,000 in FY 22-23 (as per Rule 3B of Income-tax Rules)
- Taxable amount of Employer’s contribution to PF at withdrawal stage (before rendering 5 years of service) in FY 23-24 (C): Rs 900,000 + accretion i.e. interest on employer’s contribution to PF
- Double taxation: (B+C) – (A) = Rs 150,000. In addition accretion (interest) on the employer’s contribution to PF of Rs 150,000 will also get doubly taxed.
“The government should provide a specific exemption to clarify that PF and its accretions which have been taxed earlier, should not be taxed again” Poorva tells TOI. She is of the view that a clarificatory amendment in this regard would be very helpful in avoiding the double tax situation.