New PF Income Limits and Taxability Analysis
According to the new PF income limit for the year 2022–2023, the limit has been set for government employees at a higher end of Rs. 5 lakh. Employees’ Provident Fund contributions exceeding Rs. 2.50 lakh per annum will be taxed from April 1, 2022.
The center has made new rules which aim to prevent high-earning persons from taking benefits of government welfare schemes. The Central Board of Direct Taxes had issued rules and said separate accounts within the PF account should be maintained. PF accounts will be divided into taxable and non-taxable accounts from April 1, 2022, under the new Income Tax rules. It will further mention all the contributions until March 31, 2022, as non-taxable contributions. These new income rules were notified by the center in August 2021. The existing PF accounts will be split into two accounts to enable the government to tax PF income generated from employee contributions that exceed Rs. 2.5 lakh per annum.
A new section 9D in the income tax rules has been added to implement the new tax on PF income. To calculate the taxable interest, two separate accounts will have to be maintained within the existing provident fund account during the recently concluded financial year and all the preceding years to assess the taxable and non-taxable contribution made by a person.
The central government further stated and increased the limit of taxation of interest to Rs. 5 lakh just in case any employer is not making any contribution to the fund. The amendment increasing the tax-free interest on PF contribution of up to Rs. 5 lakh would provide some respite to the large taxpayers.
This will create an effect on the high-income earners. Any employee having an annual earning of Rs. 20.83 lakh will be taxed on her EPF contribution.
EPF accounts are mandatory for employees earning less than Rs. 15000 per month and for a company with over 20 employees. Non-government employees deduct 12% of the basic salary as an EPF contribution every month.
Analysis for taxability of PF contribution for F.Y. 2022–23
Based on the previous financial year analysis i.e., April 2021 to March 2022, contribution is taxable over 7.5 lakh. Interest earned last year over 7.5 lakh is also taxable. Interest earned on amount of Employee PF + VPF over 2.5 lakh during the financial year 2021–22 is taxable in financial year 2022–23.
Payroll challenges foreseen are:
1. Interest rate by RPF/LIC/NPS is not declared and the last date for incorporating is 30th May, 2022.
2. The opening and closing balances of various schemes are required.
3. Perk amount can be calculated assuming NIL withdrawal as financial year is the first year of applicability.
4. Declaration has to be taken from employees while submitting investment declaration/proof for financial year 2022–23(Under income from other resources like Bank Interest).
5. Interest amount is not available with the employee as on date.
6. For employees covered in RPFC, contribution is getting deposited to RPFC on monthly basis and company is no having record of withdrawal taken by the employee directly from RPFC.
All these challenges have been addressed through the circular issued by EPFO. Only occurrence is required as the circular is by PF authorities and not by Income Tax Authorities.
Challenges addressed in the following way:
1) Amount taxed last year over 7.5 lacs is available in the payroll system
2) Payroll team can calculate flat rate interest on amount as per point above (for example 500000* 8.1%) — exposure to the company is mitigated as it may be a higher interest rate against average interest rate.
3) We can intimate employee to update the perk amount as charged by company while filing his individual return basis the actual perk amount calculations.
