Payroll & Compliance – The Monthly Chronicle – May 2021

In this edition, learn about key legislative updates including:

  • Provident Fund Taxation applicable for FY 2021-22
  • The income tax department has produced new thresholds and taxation of provident funds. In the below article both employee and employer contribution’s taxability are highlighted.

    For PF Employee deduction from FY 2021-22:

    From FY 2021-22, the individual employee contributes’ if it exceeds over Rs. 2,50,000 in a year then any interest income earned on contribution above 2.5 Lakh will be taxed.

    Please note: The contribution exemption limit is extended to 5 Lakh wherein employer doesn’t contribute.

    Thus, the taxability will be decided based on contribution made for the year and not as per the interest earned. Its employee’s responsibility to check their passbook and manage such interest income and related taxes.

    Taking a hypothetical example, wherein the employee contribution is 3 Lakh for the year:

    Thus, Income in hands of employee would = (3 Lakh - 2.5 Lakh) = Interest earned on 50,000Rs only.

    For PF Employer deduction from FY 2020-21:

    As per Budget 2020, employer’s contribution which is more than INR. 7.5 Lakhs in a year towards a specified fund (PF/NPS/Superannuation Fund) is to be calculated as perquisite under section “17(2)(vii) of the IT Act 1961”.

    In addition to above, the annual accretion by way of interest, dividend etc. to the specified funds attributable to such excess employer contribution is also a taxable perquisite under section “17(2)(viia) of the IT Act 1961”

    The formula to capture this new perk value is as below:

    **Taxable perk for the year = [(Amount more than 7.5 Lakh for the year / 2) X Average rate of interest] + [(Aggregate value of contribution perks under 17(2) in previous years + Total Taxable perk u/s 17(2) in previous years) X Average rate of interest]

    Average rate of interest = Amount of income earned for the year / (opening balance of PF+NPS+Supperannuation Fund + Closing balance of PF+NPS+Supperannuation Fund/2)

    Taking a hypothetical example, wherein the employer contribution is 10 Lakh for the year:

    • Income earned under PF + NPS+ Superannuation Fund = Rs.0.5 Lakh
    • Opening Balance for PF + NPS+ Superannuation Fund = Rs.10 Lakh
    • Closing Balance for PF + NPS+ Superannuation Fund = Rs. 22 Lakh
    • Accumulated contribution more than 7.5 lakh in previous years = 1 Lakh
    • Accumulated perk value for previous year under this section = 5000

    Let us calculate the average rate of interest based on above formula = 0.5 Lakh / (10 Lakh+22Lakh/2) = 3.125%

    Average rate of interest = Amount of income earned for the year / (opening balance of PF+NPS+Superannuation Fund + Closing balance of PF+NPS+Superannuation Fund/2 )

    As per perk formula = [(2.5 lakh/2)*3.125% ] + [(1Lakh + 5000) * 3.125%] = 29,406.25

    Taxable perk for the year = [(Amount more than 7.5 Lakh for the year / 2) X Average rate of interest]

     

The newsletter also covers some other topics: 

  • Process amendment for filing Karnataka monthly Professional Tax (PT) Return
  • Professional Tax annual return due date extension for West Bengal and Karnataka
  • Income Tax due dates extended
  • New ITR Forms for FY 2020-21 (AY 2021-22) are notified

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