Clarify taxation of PF contributions–the economic times

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The government needs to clarify, at the earliest, its amended provisions relating to taxation of the interest earned on contributions to a recognised provident fund (PF). The budget proposed limits on the contributions, the interest on which is eligible for tax exemption, to `2.5 lakh by the employee.

The latest amendment would appear to raise the exempt contribution cap to Rs 5 lakh, but only when made to a fund to which the employer does not contribute. A fund to which the employer does not contribute is, of course, different from funds to which the employer has not contributed.

If the more liberal saving allowance of Rs 5 lakh is restricted to funds to which the employer does not contribute, the concession would apply only to the General Provident Fund of civil servants. And that would discriminate against private sector employees. If the provision is intended to cover private sector employees as well, how does it make sense to distinguish between contributions by the employee or the employer?

In the interest of equity, it does make sense to limit tax concessions on total contributions to a provident fund. Otherwise, the more well-off would enjoy greater tax concessions than are available to the less well-off. The distinction the government makes between an employer’s contribution and an employee’s contribution is meaningless. Every rupee of an employee’s earning belongs to him or her.

There is no element of charity involved in what a company counts as an employee’s cost to the company (CTC). How this CTC is divided up or dressed up is a matter of detail, whether as basic salary, allowance, special pay, food coupon or contribution to the provident fund.

If the government wants to cap concessional tax treatment on savings, it should be to the total savings in the provident fund, not segment-wise. The new labour code’s insistence that provident fund deduction should be based on 50% of total salary stems from a similar failure to appreciate the concept of CTC. Docking more pay in the provident fund will not alter CTC, but only shrink disposable income, to no one’s benefit.

This piece appeared as an editorial opinion in the print edition of The Economic Times.


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