BUSINESS

Refund of contributions to recognised PFs — Whether taxable?

My son recently resigned his job as software engineer to pursue higher studies. While settling his PF dues, the company has treated the refund of contribution to PF as income, spreading it over three years and has rec

overed income-tax thereon. Is there any provision for recovering tax on the PF contribution of the company?

Part A of the Fourth Schedule provides for tax treatment of recognised provident funds and the contributions thereto.

Contribution to recognised provident fund would qualify for deduction in the hands of the contributor under Sec. 80C and refund therefrom of both principal and interest will be exempt under Sec. 10(12) of the Income-tax Act, subject to the provisions under Rule 8 of Part A of the Fourth Schedule. Sec. 10(12) itself makes such a qualification.

Rule 8 makes premature repayment of accumulated balance from recognised provident fund taxable in respect of employer’s contribution, if the employment with the employer is for less than five years except on grounds of ill health or such other reason beyond the control of the employee. This tax is avoided, if the fund is transferred to another recognised provident fund of the same or a different employer.

Rule 10 makes such refund, tax deductible at source, where such repayment is taxable. Sec. 89 read with Sec. 17(3) and Rule 21A tempers the bunching effect of taxing the accumulated balance for more than a year in the year of payment by spreading it for three years. The employer was, therefore, right in recovering the tax.

The employee should offer the entire contribution of the employer in the year of receipt subject to a claim for relief under Sec. 89, if the rate applicable for earlier two years is lesser, so as to get the benefit of such lower rate.

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