In the Budget, the government had proposed to tax interest earned on employee contributions beyond Rs 2.5 lakh from the next financial year but had said the details would be worked out.
Tax consultants as well as officials told TOI that the entire process could be quite complicated as it would require employees to maintain separate accounts if the entire tax was to be levied at the time of withdrawal.
Sources told TOI that the government is looking to prescribe two sets of accounts for those contributing over Rs 2.5 lakh annually. The first would be for up to the threshold, while the other would capture the interest income above the taxfree level. The accounts would be maintained by PF authorities, officials indicated. This move is expected to address concerns over complex accounting rules.
The other major worry is whether the interest income above the tax-free level will be on an accrual basis, which is every year, or at the time of withdrawal when an employee retires or withdraws the PF corpus.
“If it is on accrual basis, what about an employee choosing to offer it on receipt basis — on the basis of method of accounting chosen by him?” a tax consultant asked.
The other complication is an individual’s income ballooning at the time of withdrawal, pushing him from one tax bracket to another or even into the ‘super rich’ category, where the levy is over 42%.
The government may also need to clarify about who will deduct tax at source, a consultant said. The proposed tax on interest is expected to be taxable under income from other sources. “So, will the employer have to deduct tax or will Section 194A (interest paid on FDs, loans, etc) apply? This needs to be clarified,” he added.
The developments are being watched closely as several middle-class individuals make voluntary PF contributions, which take their annual contribution beyond Rs 2.5 lakh. The government, however, believes that the move will impact high net worth individuals, with sources dishing out data to argue that there was an individual with a PF balance of over Rs 100 crore, while there were two who had a corpus in excess of Rs 80 crore.