NEW DELHI: In a move that will make saving in pension funds less lucrative for high-salaried individuals, the government has proposed a cap of Rs. 7.5 lakh for the annual tax-free contribution an employer can make on behalf of an employee in all such instruments combined.
Under the existing provision, employer contribution exceeding Rs. 1.5 lakh in a year under recognised provident funds like EPF or funds of exempted establishments is taxable. However, there is no such ceiling on employers’ contribution to the National Pension Scheme or other superannuation funds. Investment in pension funds is exempted from tax at all levels and is considered a safer option, making it attractive even though it fetches lower returns.
The proposed rule will cover the National Pension Scheme and other superannuation funds as well.
The provision will lead to higher tax liability on both the employee and the employer, a senior government official told ET. “The employer shall not be able to deduct the contribution made above the ceiling from his net income, thus increasing employers’ wage liability; while the employee will find this added to his taxable income, thus enhancing his tax liability as well,” the official said.
Another official ET spoke to said it was indeed a revenue mobilisation measure, though the proceeds would be small. “To prevent company’s expenditure, employers’ often park money in such pension funds to evade taxes as it is beneficial to employees as well. Hence, the proposal to put an upper limit on investing in such funds,” the second official said.
“The idea is to encourage high-income salaried individuals to pay taxes rather than saving through tax planning by contributing higher amount to these retrial schemes and also earning tax free,” PwC India partner and leader (personal tax) Kuldeep Kumar said.“However, the implementation of this provisions and computation of taxes is going to be a challenge for the companies,” he added.