NEW DELHI: Finance minister Nirmala Sitharaman’s amendment to her budget proposal on taxing interest income on provident fund contributions is expected to largely benefit babus, who park their surplus funds in the general provident fund.
Instead of the Finance Bill proposal of taxing interest earned on employee contribution beyond Rs 2.5 lakh a year, Sitharaman doubled the limit in cases where there is no employer contribution.
There are only a handful of private sector employees who stand to gain with almost the entire benefit going to government employees. Under GPF, the employee is the sole contributor with the government only paying interest. A lot of junior employees as well as top civil servants contribute significantly more than the statutory level and were upset by the government’s budget announcement. The amendment by the FM will certainly change their mood.
“Contributions to PF are made through the employer, and hence for employees in the private sector, there would not be a situation where the employee contributes and there is ‘zero’ contribution from the employer. Hence the limit of Rs. 2.5 lakh per annum continues to be relevant to the private sector.
However, for government employees, where the employees are eligible for pension, there would be no employer contributions made to the PF account. In these cases, the contributions would be made only by the employees, and it is this category of employees who would be benefited by the enhanced limit of Rs 5 lakh,” said Saraswathi Kasturirangan, partner at Deloitte India.
For private sector employees, there are several issues that the income tax authorities need to clarify, starting with when the tax will be deducted to how it will be accounted for.
Tax experts are worried since it took Sitharaman’s team almost a year after announcing a tax in case where the employer contributes over Rs 7.5 lakh annually in PF to notify the rules.
Later, the Rajya Sabha approved the bill and the amendments by a voice vote. With this, the parliamentary approval for the 2021-22 budget is complete
The FM’s reply was interrupted by TMC members over the issue of implementation of central government schemes in West Bengal.
Earlier while replying to the debate, the finance minister pointed to low inflation, robust economic growth, record foreign investment and lower fiscal deficit as signs of the government’s deft handling of the economy.
She attacked the Congress-led UPA government for leaving a “mess” and mismanaging the economy which the Modi administration had set right.
“India was one of the fragile five economies when Arun Jaitley (Modi government’s first finance minister) inherited (in 2014). It became one of the fastest-growing economies. You created a crisis, Jaitleyji and Prime Minister Modi handled it,” she said. “The 2008 financial crisis was nothing in comparison to Corona crisis of last year.”
The finance minister also said that there is no risk of a downgrade of the country’s sovereign rating due to a higher fiscal deficit in the current year which is due to the increasing spending to provide a boost to the economy.
“India enjoys an investment-grade rating and we are not foreseeing any change or any chance of a downgrade due to us incurring higher deficits,” she said, adding the higher deficit was resulting from higher spending and increased borrowings,” said Sitharaman.
“So globally that is the advice everybody is receiving and we are also following. So it shouldn’t hurt our rating,” the FM said, adding that India was following the advice of economists and rating agencies who say that government spending is needed to put pandemic economies back on track.