The Budget proposes to cap the annual employer contribution to EPF at Rs. 1.5 lakh per year. Currently, there is no monetary limit on the employer contribution under EPF, with only ceiling being that it would be 12 per cent of the salary of the employee.
Once the proposal comes into effect, employer contribution of Rs. 1.5 lakh per annum or 12 per cent of salary to EPF – whichever is less – will only be tax exempt.
This means that contribution to recognised EFP by employer in excess of Rs. 1.5 lakh will be taxable in hands of employee, say tax experts.
For example, a person earns Rs. 15 lakh as basic pay (annual). So the employer needs to contribute Rs. 1.8 lakh (12 per cent) to EPF. According to the proposed new norm, a contribution more than Rs. 1.5 lakh will be taxed. So Rs. 30,000 (Rs. 1.8 lakh – Rs. 1.5 lakh) will be considered as income of an employee and taxed accordingly.
The finance ministry however said that it has “received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in National Pension System.”
In another EPF-related announcement, the finance minister in the Budget speech said, “Exemption is proposed to be provided for one-time portability from a recognised provident fund or superannuation fund to National Pension System.”
This means that if employees transfer 60 per cent of their provident fund kitty to NPS, instead of withdrawing it, the proposed tax on PF will not be applicable.
Under current tax laws, pension or annuity income earned from NPS is taxed according to the person’s tax slab.