Higher tax liability on employer and employee

It is proposed that the employer’s provident fund (PF) contribution over Rs. 7.5 lakh will be taxed.

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The Budget has clearly made saving in pension funds less attractive than it was before, as it proposes that provident fund (PF) contribution only up to Rs 7.5 lakh will be free of tax. Over Rs 7.5 lakhs, the employers will have to pay tax. In other words, as per the current provisions, if the contribution by an employer to the account of an employee in a recognised provident fund, is more than 12 per cent of salary, it will be taxable.

Presently, although employer contribution beyond Rs. 1.5 lakh annually, as per the employees’ provident fund (EPF) or funds of exempted establishments is taxable, there was no ceiling on employers’ contribution to the National Pension Scheme (NPS)or other superannuation funds exists. Therefore, investing in pension funds was considered a good and safe option, despite low returns, as it is exempted from tax at all levels. It was a common practice for employers to invest in such pension funds to avoid company expenditure, and escape taxes, while benefitting the employees.

But with the proposed change, NPS and other similar funds will cease to be as attractive. The tax liability will increase, not just for the employer but the employee as well.

It will not be possible for the employer to deduct the contribution made beyond the said limit from his net income. This will increase the wage liability of the employer, which will be added to the employee’s taxable income. Therefore, the employee’s tax liability will also go up.

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