Industry and tax professionals want the government to review the cap of Rs 7.5 lakh cap on contributions to National Pension Scheme, provident fund and superannuation fund in the budget.

The government introduced the cap through amendments to the sub-clauses under section 17 of the income tax act via Finance Act 2020.

According to the amendment, if the contributions towards employee welfare schemes such as provident fund, NPS and superannuation funds are more than Rs 7.5 lakh, the excess amount will be taxed as perquisite in the hands of the employee.

The interest or dividend on any contribution by the employer towards the contribution above the Rs 7.5-lakh-limit is also taxable as a perquisite in the hands of the employees.

Under the existing provisions of the Income Tax Act, any contribution by the employer to the account of an employee in a recognized provident fund exceeding 12 per cent of salary is taxable.

Besides, any contribution made by the employer to a superannuation fund exceeding Rs 1.5 lakh is treated as perquisite and is taxable.

In NPS, the taxpayer is allowed a deduction of 14 per cent of the salary contributed by the central government or 10 per cent in other cases.

The government was of the view that it was possible to structure the salaries of high-earners in such a manner that a large part of their income were parked in these funds to lower tax liability.

Industry body Ficci in its pre-budget memorandum pointed out that such a cap would discourage long term investment. “It is requested to review section 17(2)(vii) i.e, on taxing employer contribution beyond Rs 7.5 lakh and interest accretion thereon, u/s 17(2) (viia). It is submitted that contributions to approved superannuation fund and NPS be kept out of provision considering they are already under EET regime (albeit partially).”

Ficci said the amendment was undermining the fundamental attractiveness of the retiral schemes. The amendments have introduced additional challenges in identifying the interest relevant to the excess contribution.

Tax professionals also said the government may consider reviewing and raising the limit above Rs 7.5 lakh in the upcoming budget.

“Though the limit was imposed with an intent to curb tax avoidance for high salaried employees making contributions to the funds, it would not be prudent to cut investments in them” Suresh Surana, founder RSM India.

“Such investments are long term in nature and are generally towards retirement funding. It would be prudent to review the deduction limit to promote long term investment by considering raising the limit to a reasonable extent.”

TWEAK CALL

• Any contribution above Rs 7.5 lakh or interest accruing thereof is taxed
• Case to review cap as it reduces the attractiveness of retirement schemes
• Besides, it will limit long-term investment