The government is considering tweaking and bringing back a controversial tax on provident fund, including a proposal to have 70% of an employer’s contribution either taxed or mandatorily parked in a taxable pension scheme.
An employer’s contribution to the provident fund (PF) is not taxed now. The government’s argument is if an employee’s cost-to-company is Rs 1 crore a year then about Rs 12 lakh (employer’s contribution to PF) of that pay is tax-free, which it sees as unfair.
An employer now contributes 12% of an employee’s basic pay to provident fund. An employee contributes a similar amount to the fund.
The plan now is to funnel 70% of an employer’s provident fund contribution into a pension scheme run by the Employees’ Provident Fund Organisation (EPFO). The remaining 30% can go to the provident fund along with the employee’s contribution, the Mint reported on Thursday.
If an employee opts out of the EPFO pension scheme then she will have 70% of her employer’s contribution to the provident fund taxed.
The salary threshold for the new proposal is yet to be decided but it is unlikely to apply to those earning less than Rs 100,000 a month so as to avoid any backlash from the middle-class, the newspaper said. Given the subject’s sensitivity, the government may not even call the new proposal a tax.
“The idea is to create a pension society and pensions are always taxed,” the newspaper quoted an unnamed government official as saying.
“We have a mechanism to make this happen and it’s being worked on.”
The proposed formula draws from a similar existing scheme for those earning less than Rs 15,000 a month. This is based on the logic that the not-so-well-paid people need some form of regular income, through pensions, after retirement, the Mint said.