The challenges in computing taxes on employer contributions to EPF and NPS

The Finance Act 2020 introduced a new provision under the Income-tax Act, 1961 (the Act) by virtue of which employer contribution to Employers Provident Fund (EPF), National Pension System (NPS) or any other superannuation fund (‘SF’), exceeding Rs 7,50,000/- per annum in aggregate (now referred as ‘excess contributions’), is now taxable in the hands of the employee as perquisite.

Further, income accruals on such excess contributions by the employer will also be considered as taxable on a year-on-year basis in the hands of assessee with effect from FY 2020-21.

Earlier, senior-level salaried employees would structure their salary with maximum possible employer contributions towards specified retirals such as EPF, NPS and SF as the employer contributions were not taxable.

The above provision to tax employer’s contribution towards such funds exceeding Rs. 7,50,000/- per annum will restrict the benefits availed by salaried employees.

So also w.e.f. 1.4.2021, interest earned on employee’s contribution in excess of Rs. 2,50,000/- per year shall also be come taxable in the hands of assesse, however how this tax will be deducted, when it will be deducted, who will deduct the tax or whether employee has to pay the tax these and many more related questions are still unanswered.

From the News Room of Dayanand N. Mangaonkar