In the Union Budget 2020-21, Finance Minister Nirmala Sitharaman has introduced a cumulative upper ceiling of Rs 7.5 lakh for the three investments which give tax benefits.
With effect from April 1, 2021, the combined upper limit of Rs 7.5 lakh with regard to employer's contribution in a year to NPS, superannuation fund and recognised provident fund and any excess contribution will be taxable.
The Budget has also proposed that even interest and dividend earned during the previous year would also be taxable. Interest is treated as perquisite to the extent it relates to the employer's contribution which is included in total income.
The new amendment will apply from assessment year 2021-22. Employer's contributions to PF and NPS were tax exempt so far without an amount specific ceiling.
"There is no combined upper limit for the purpose of deduction on the amount of contribution made by the employer. This is giving undue benefit to employees earning high salary income," the Budget documents say.
While an employee with low salary income is not able to let the employer contribute a large part of his salary to all these three funds, employees with high salary income are able to design their salary package in a manner where a large part of their salary is paid by the employer in these three funds. "Thus, this portion of salary does not suffer taxation at any point of time, since Exempt-Exempt-Exempt (EEE) regime is followed for these three funds. Thus, not having a combined upper cap is iniquitous and hence, not desirable," it says.
( With inputs from IANS )