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Tax only on employee PF share over ₹2.5L

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I work in an IT company, and my contribution to PF is 10,000, which is matched by my employer. If I want to contribute more towards PF, will that be capped at 10,000 per year? Will tax exemption be given only for PF investments up to 2.5 lakh? Will voluntary provident fund (VPF) contributions up to 2.5 lakh per year also be tax exempt?

—Snehal

As per the Finance Act, 2021, the interest accrued on contributions in excess of 2.5 lakh per annum made by an employee to the employees’ provident fund from FY22 onwards shall now be taxable. An employee’s contribution would include both normal PF and VPF contributions. Further, there is no cap on VPF contribution subject to net salary. The employee may choose to contribute higher VPF subject to EPF wages. However, the interest on employee PF contribution in excess of 2.5 lakh shall be subject to tax.

In the instant case, as the employee’s annual normal contribution is 1.2 lakh, the employee’s VPF contribution up to 1.3 lakh will not trigger income tax on interest income.

The income tax on interest income shall be triggered only on an employee’s contribution amount exceeding 2.5 lakh.

Furthermore, for computing 2.5 lakh, only the employee’s contribution (normal + VPF) is required to be evaluated and not the employer’s contribution.

Please note that the rules governing the manner and timing of computation of such taxable interest have not yet been prescribed.

I work as a research assistant for a reputed institution in India. The emolument for the same is 50,000 per month for a period of six months, extendable up to 1 year. However, I am unsure whether research emolument requires payment of income tax. I have not been able to find information offering clarity on the matter. Kindly clarify.

—Vaishakh Nair

According to the Income Tax Act, 1961, any income received by a person is taxable unless a specific exemption or provision is prescribed in this regard.

Depending on the contractual arrangement between you and the institution, in case it is established that there is an employer-employee relationship between you and the institution, the emoluments received by you shall be chargeable to tax as salary income.

However, in case the contractual arrangement is in the nature of professional fees, the emoluments received by you shall be taxed as professional income (i.e. under income from business or profession). In such a case, depending on the gross receipts or income of the business or profession—applicability of tax rates (normal or presumptive tax rates), applicability of GST and compliance thereunder, applicability of maintaining books of accounts and conducting tax audit would need to be evaluated.

Further, in case it can be established that the emoluments received by you are in the nature of scholarship granted to meet the cost of education, the emoluments may be considered as exempt from income tax.

Parizad Sirwalla is partner and head, global mobility services, tax, KPMG in India.

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