Employer's contribution to provident fund beyond Rs 1.5 lakh to be taxed

The finance minister has capped employers' contribution to provident fund at Rs 1.5 lakh a year. Whatever an employer contributes beyond this limit will be subject to tax in the hands of the employee.

Parizad Sirwalla, partner and head of global mobility services-tax, KPMG India, said: "The employer's contribution to EPF forms a part of the cost to company (CTC). And, it is mandatory that the employer contributes 12 per cent of the basic pay towards the EPF."

Say, a person earns Rs 20 lakh as basic pay. The employer will need to contribute Rs 2.4 lakh (12 per cent) to EPF. The new norms state that a contribution more than Rs 1.5 lakh will be taxed. This means, the employee will need to pay tax on Rs 90,000 (Rs 2.4 lakh-Rs 1.5 lakh).

Until now, there was no tax on employer's contribution.

The government has also increased the tax exemption on employer contribution to the superannuation scheme. Contribution of up to Rs 1 lakh was exempted but this has been changed to Rs 1.5 lakh. In an employee's superannuation scheme, the employer maintains a superannuation fund and regularly contributes to it. This pool can be used to make pension payments to retired employees.

Tax experts said the step would bring all retirement schemes on a par.