Some facts to be kept in mind while tax planning for FY 2022-23

LET'S CONSIDER SOME IMPORTANT CHANGES FOR FY 2022-23

1. NPS CONTRIBUTION

For the central government employees, the government was already contributing 14% of employee's wages towards employee's NPS account. Starting this FY, state government employees will receive a 14% contribution into their NPS account from their respective state governments. Deduction for employer contribution to NPS has been increased from 10% to 14% for state government employees on par with central government employees. However, it has not been extended to non-govt employees.

PLEASE NOTE THAT:

A. An additional deduction for investment up to Rs. 50,000 in NPS (Tier I account) is available exclusively to NPS subscribers under subsection 80CCD (1B). This is over and above the deduction of Rs. 1.5 lakh available under section 80C of Income Tax Act. No tax benefits are available for investment in Tier II Account ,so keep in mind while choosing investment in NPS.

B. Corporate Employees

(i) 80CCD(1), which comes under Section 80C, covers self-contribution. Salaried employees can claim a maximum deduction of 10% of their salary.

(ii) Additional Tax Benefit is available to Subscribers under Corporate Sector, u/s 80CCD (2) of Income Tax Act. Employer's NPS contribution (for the benefit of employee) up to 10% of salary (Basic + DA), is deductible from taxable income, without any monetary limit. This tax benefits come under Section 80C.

(iii) Corporates

Employer's Contribution towards NPS up to 10% of salary (Basic + DA) can be deducted as 'Business Expense' from their Profit & Loss Account.

(iv) Person engaged in business/profession: you can claim deduction of 20% of your Gross Total Income u/s. 80CCD(1) of the IT Act,1961. He/she is not able to claim deduction u/s. 80CCD(2).

(v) Tax Deduction by investing in NPS as follows;

2. EPF CONTRIBUTION

In EPF, 12% of wages is contributed by the employee but rules allow the employee to contribute a higher amount as a voluntary provident fund. Till now, the entire contribution earned tax-free interest income. Going forward, if your contribution towards EPF is more than Rs 2.5 lakh a year, the interest earned on the amount exceeding the threshold limit will be taxable. For the government employees, the limit will stand at Rs 5 lakh.

PLEASE NOTE THAT: In the Union Budget 2021, Finance Minister Nirmala Sitharaman had announced that the interest earned on employees' contributions to their provident fund in excess of Rs 2.5 lakh a year will be subject to tax.

The Income Tax Department  has proposed that there will be two accounts in EPF Account of an employee, these are Taxable Account and Non-Taxable Account. The contribution up to Rs. 2.50 Lakhs will be credited in Non-Taxable Account and contribution above Rs. 2.50 Lakhs will be credited in Taxable Account. The interest in Non-Taxable Account will be tax free and interest in Taxable Account will be taxable in the hand of employee as " Income From Other Sources".

Let's understand through an example:

Mr. A, an employee contributing Rs. 55000/- pm in EPF and he has withdrawn Rs. 3,00,000/-in the month of January,2022. Mr. A's total contribution as on 01/04/2021 was of Rs. 30,00,000/- and the rate of interest will be @7.1% p.a. The Calculation of Taxable and Non-Taxable contributions are as follows;

CLOSING BALANCES IN TAXABLE AND NON-TAXABLE ACCOUNTS TO BE CARRY FORWARD FOR FY 2022-23

PF WITHDRAWAL RULES 2022

The Employees' Provident Fund Organization (EPFO) has revised several of its rules regarding withdrawal from the Provident Fund (PF) account in 2021. The aim of these revisions is to provide easier access to their PF funds to subscribers who are facing financial difficulties due to the coronavirus pandemic.

According to the new rules, PF account holders can withdraw money equivalent to three months of their basic salary plus dearness allowance or 75% of the net balance in their PF or EPF account, whichever is lower.

This will be taken as a non-refundable deposit. These withdrawal claims can be raised online. Online claims are stipulated to be settled within 3 working days while offline claims can take up to 20 days for settlement.

PLEASE NOTE THAT:

1. EPF corpus withdrawal is exempted from tax but under certain conditions. Tax exemption on EPF corpus is permitted only if an employee contributes to the EPF account for 5 continuous years. The EPF amount is taxable if there is a break in the contribution to the account for 5 continuous years. In that case, the entire EPF amount will be considered as taxable income for that financial year.
2. Tax is deducted at source on premature withdrawal of the EPF corpus. However, if the entire amount is less than Rs.50,000, then TDS is not applicable. Keep in mind, if an employee provides PAN with the application, the applicable TDS rate is 10%. Otherwise, it is 30% plus tax.
3. Form 15H/15G is a declaration form, which states that a person's total income is not taxable and thus, TDS is avoidable.
4. In case of person facing unemployment for a period of one months ,he may withdraw the amount from EPF Account , but he has to prove his unemployment. You can withdraw 75% of the Corpus in this case.
5. An employee does not have to await approval from the employer for EPF withdrawal anymore. It can be done directly from the EPFO, provided the employee's UAN and Aadhaar are linked, and the employer has approved it. EPF withdrawal status can be checked online.
6. Although the EPF corpus can be withdrawn only after retirement, early retirement is not considered until the person reaches 55 years of age. EPFO allows withdrawal of 90% of the EPF corpus 1 year before retirement, provided the person is not less than 54 years old.
7. The withdrawal from account is allowed only in case of emergency or on circumstances mentioned below;

3. FILE AN UPDATED IT RETURN

A new provision permitting taxpayers to file an updated return on payment of additional tax has been introduced. This updated return can be filed within two years from the end of the relevant assessment year. This new system of filing revised ITR will help taxpayers voluntarily declare any missed income and reduce litigation.

The Union Budget has sought to give opportunity to taxpayers to rectify mistakes related to misreporting of income when filing income tax return for a financial year. It has created a provision for allowing such taxpayers to file an updated return within two years from the end of the relevant assessment year. This is irrespective of whether the taxpayer has filed a return previously for the relevant assessment year, or not.

The filing of the updated return will be allowed only after payment of a of amount equal to 25% or 50% as additional tax on the tax payable on the additional income furnished.

PLEASE NOTE THAT:

4. In this case the government has provided a window of two years from end of relevant Assessment Year to rectify any mistake in return filed earlier.
5. You cannot file a rectified return to claim refund or increase loss or decrease profit declared in earlier returns. You are allowed to rectify only mistakes.
6.  You are allowed to declare if any income missed out or you have claim excessive deduction, rebate ,etc. and want to declare you income and not to claim deductions to increase loss or reduce profit or claim refund in the return filed earlier.
7. Further, as a deterrence against tax evasion, the Budget has provided that no set off of any loss shall be allowed against undisclosed income detected during search and survey operations. This is in response to cases where individuals or entities have set off brought forward losses against undisclosed income detected in search operations. With this provision, such individuals will no longer find any space to wiggle out of tax liability.

4. VIRTUAL DIGITAL ASSETS TAX

Virtual Digital Assets will include cryptos such as Bitcoin, Ethereum, etc., and other digital assets such as Non-fungible tokens (NFTs) and will be subject to taxation.

Income from transfer of any virtual digital asset is to be taxed at the rate of 30% applicable from April 1, 2022.

TDS of 1% to be charged on payments made for transfer of virtual assets applicable from July 1, 2022 and the gift of virtual digital assets will also be taxed in the hands of the recipient.

PLEASE NOTE THAT:

1. The Government has not given legal tender to the Virtual Digital Assets.
2. On contrary the income arise due to trading of virtual asset will be taxable @30%. Since income from all sources ,whether illegitimate or legitimate will be taxable under provisions of Income Tax Act, 1961.

Latest updates - Clarification on proposed Section 115BBH in Budget 2022

1. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.

2. Infrastructure cost incurred on mining crypto assets will not be treated as cost of acquisition.

Union Budget 2022 Outcome

1. Income from transfer of virtual digital assets such as crypto, NFTs will be taxed at 30%.

2. No deduction, except the cost of acquisition, will be allowed while reporting income from transfer of digital assets.

3. Loss from digital assets cannot be set-off against any other income.

4. Gifting of digital assets will attract tax in the hands of receiver.

5. Losses incurred from one virtual digital currency cannot be set-off against income from another digital currency.