Indian Union Budget 2021-22: Broadly in India, there are three types of social security contributions – Provident Fund, Superannuation Fund and National Pension System – made by employer which provide retirals benefits to employees and help them in managing their post-retirement expenses. Provident Fund (PF) is governed by the provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act). Similarly, the contribution to Superannuation Fund (SF) is governed by the provisions of the Employees Superannuation Fund Act whereas contribution to the National Pension System (NPS) is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).
While the contribution to PF is mandatory for certain class of employees, however, the contribution to SF and NPS is not mandatory on employer’s part and may be provided as an additional benefit to employee on voluntary basis. Also, under SF, only employer is required to contribute, and employee cannot be forced to make any contribution.
Regarding tax implications of various social security contributions made by the employer, the domestic tax law provides tax exemption/deduction on employer’s contribution to these funds up to specified limits. The limits for such tax exemption /eligible deductions are discussed below:
*Any contribution to PF or SF over and above these limits is taxable in the hands of employees as salary on which employer is required to deduct taxes at the applicable slab rates. Any contribution to NPS over and above this limit is not allowed as deduction.
The Budget 2020 amendment gave rise to certain ambiguities in terms of actual implementation and related nuances. Now, with Budget 2021, it is expected from the government that besides announcing the Covid-related relief measures, certain persisting ambiguities and issues (as discussed below) be also clarified.
Ambiguity between the PF law and the Income-Tax law while computing PF contribution
As per the prevailing PF law, an employer is required to contribute 12% of salary of employee as PF contribution. The ‘salary’ includes basic wages, dearness allowance (DA) and retaining allowance (if any) and cash value of food concession. Further, it also includes the allowances which are not variable in nature and paid to all employees on uniform basis (as ruled by the Apex Court also). Contrary to this, as per the domestic tax law, salary for the purpose of tax deduction on PF contribution includes only DA and excludes all other allowances. Hence, there exists an incompatibility between the definition of salary while computing PF under the EPF Act and determining PF deductibility under the Income-tax law. Hence, it is recommended to align the definition of salary for PF contribution both under EPF Act and Income-Tax law to avoid any future litigation.
The above amendment in the law should also be made considering the newly-introduced social security code where the definition of ‘wages’ for the purposes of computation of PF contribution has been substantially changed. The new definition of ‘wages’ is expected to increase the PF contribution and hence, it is the need of the hour to align the definition of income-tax law with PF law so that there is no unwanted hardship and litigation around claim of PF deduction in future.
Taxability of excess contributions to Social Security Funds – Amendment by Budget 2020
As discussed above, the Budget 2020 came up with amendment in provisions of Income-tax law as per which any excess contribution to PF, SF and NPS fund, which in aggregate exceeds INR 7,50,000, will be taxable in employee’s hands as perquisites. In other words, the overall tax benefit for employer’s contribution to these funds was restricted to INR 7,50,000. Also, any annual accretions by way of dividend/interest on such taxable contributions were also made taxable as salary. Post this amendment, industries have raised many concerns and have some questions as below:
# The industries are awaiting a mechanism through which the details of taxable annual accretion (i.e. dividend or interest) is required to be shared by the respective funds on a monthly/ annual basis so that the Employer may consider the appropriate perquisite value while withholding taxes on salary.
# It is also suggested that the manner/ chronology of allocating taxable contribution in excess of INR 7.5 lakh between the three schemes be specified. This is required since rate of annual accretion is different in all the schemes.
Hence, it is suggested to issue further clarifications on this aspect to bring clarity and avoid any inadvertent non-compliance on employer’s part.
Apart from the above specific changes, it is also expected that the government would announce further relief measures to tackle the losses suffered by businesses from Covid-19. Earlier during the pandemic, the government announced several relief measures in terms of reduced /forgone PF contributions, relaxation in PF related compliances, allowing partial withdrawal of PF etc. for the benefit of employees and employers both. The government had also borne the PF contributions for the period from March to May 2020, for the employees drawing wages below INR 15,000 in the establishments employing up to 100 employees where 90% of them are drawing wages below INR 15,000. However, since the pandemic is not yet over and businesses are still recovering, similar benefits are expected in the upcoming budget to fight the Covid-19 pandemic in an effective way.
Towards this end, the Ministry of Labour and Employment has also suggested to decrease the rate of contributions for both employers and employees. Considering the economic slowdown and in order to boost the consumption, changes aimed at increasing the take home salary of taxpayers would be a welcome move by the government.
(By Akhil Chandna, Associate Partner, Grant Thornton Bharat LLP)