Global Employer Services News

India - Private sector employees should focus on EPF, PPF, NPS for retirement

In an interview with MintGenie, Preeti Sharma of BDO India discussed recent tax developments that affect individual taxpayers. Below are some excerpts from the interview.
The new tax regime, which India introduced in 2020, giving taxpayers the option to choose between the traditional tax system and the new one, provides favourable results to certain categories of taxpayers, but it has not been chosen by many. Why? What changes can be made to render it more attractive?
Individuals opting for the new tax regime cannot claim several exemptions and deductions, such as house rent allowance, leave travel concession, savings under 80C such as Employee Provident Fund (EPF)/Public Provident Fund (PPF)/Equity Linked Savings Scheme (ELSS), medical insurance premiums under 80D, National Pension Scheme (NPS) under 80CCD, and many more.

Given that the legacy tax system was developed to encourage investment planning to save taxes, many individual taxpayers are attuned to make those annual investments that are now not eligible for a tax break under the new tax regime.

With private sector employees in India not being eligible to receive any pension post-retirement, EPF, PPF, NPS, and ELSS are in high demand among individuals. These investments serve a dual purpose -- corpus formation for retirement and eligibility to claim a deduction from taxes against these payments.

With these deductions being unavailable under the new tax regime, it has attracted few takers. The government should mark down a clear transition plan to move to the new tax regime, with certain modifications to allow deductions for select investments. This would help to build a pensionable society.
Which tax-efficient salary components may form part of an employee compensation structure? 
There are limited tax planning opportunities available to the salaried class. The new tax regime provides  preferential tax rates, but it also limits the deductions that can be claimed by an Individual taxpayer. However, we have listed a few salary components that may continue to be tax-advantaged under the new tax regime:
  • Employer’s contribution to National Pension Scheme: A deduction from taxable income can be claimed for the amount contributed by the employer up to 10% of basic salary + dearness allowance for the financial year.
  • Running and maintenance of employer-owned vehicle: Depending on the type of car and its usage, there are certain preferential provisions the employee can benefit from.
  • Telephone reimbursement: Expenditures incurred by the employer on behalf of the employee on telephones (including mobile phones) are not taxable in the hands of the employee.
What are the challenges individuals face filing their tax returns and dealing with the Revenue authorities to complete assessment procedures?
The Income Tax portal and tax return filing process are fully automated, and the return forms are pre-filled with some taxpayer information that is available to the Revenue authorities. While completing this process, the taxpayer may have to make various decisions to ensure that the process is completed in an accurate and error-free manner. Ensuring this may pose a challenge for non-tax professionals. A few examples include:
  • Identification of the right form to be used for filing the return which may depend on residential status and sources of income;
  • Identification and quantification of income, related expenses, and various tax breaks that the taxpayer may be eligible to report in the tax return;
  • Choosing the right tax regime; and  
  • Reporting assets and liabilities in India and abroad.
After filing, a few tax returns are picked by the revenue authorities for further scrutiny. Even though only a small percentage of returns are selected for scrutiny, the government has faced challenges in reducing the number of tax disputes and litigation. A significant number of cases are pending in various forums. The introduction of faceless assessments and appeal schemes was intended to avoid personal bias and reduce corruption in the process. Until this is achieved, many taxpayers may face problems while trying to explain their tax filing to the tax officer. A combination of faceless assessments with an option to connect personally with the revenue authorities will help in solving this challenge.
What are the expected labour law-related changes that may have an impact on an Individual’s compensation in hand?
With the election of the current government to a third term, multiple policy level changes are expected.

One of them is the implementation of labour codes that have already been approved by both houses of Parliament and are awaiting announcement on the date of enforcement.

One major change in the labour codes involves the definition of wages. Multiple employee benefits are currently calculated with reference to multiple definitions of wages. These definitions are updated as a single definition under the labour codes. Minimum wages, provident fund, gratuity, leave encashment, overtime, ESI, and others may need to be calculated considering the new definition, which may impact the employees’ in-hand compensation along with bringing incremental costs to the employers.
Name the top four to five things that a foreign national working in India should be mindful of on the regulatory and compliance front.
Broad issues that a foreign national coming to work in India should consider are as follows:
  • Immigration: The expatriate should travel on the correct visa category (business visa/employment visa/ student visa, depending on the purpose of the visit) and should register with the Foreign Regional Registration Office within the prescribed timelines.
  • Taxability of the employee: The salary received by an employee for rendering services in India would be liable to tax in India as employment income, irrespective of its place of receipt.
  • Social security: Unless an individual who is a foreign passport holder is covered under a Social Security Agreement signed between India and their home country and has received a certificate of coverage, the individual is mandatorily required to contribute under the EPF Act on their salary. There is a recent High Court ruling on the validity of this provision, but the matter would receive finality at the Supreme Court level.
  • Permanent establishment and transfer pricing: The presence of employees of a foreign entity in India may create a permanent establishment (PE) exposure for the foreign entity. The secondment/deputation transaction between related parties would be subject to transfer pricing regulations and must be accurately structured to avoid non-compliance.
If someone wants to move outside India to take up employment, how will the person’s tax status change in India? Tell us a few myths that such a person should be aware of to avoid any noncompliance.
Generally, an Indian citizen who has spent at least 60 days in India during a given financial year and at least 365 days in the past four financial years is deemed a Resident & Ordinarily Resident (ROR) of India, making the citizen liable to tax on his or her global Income in India.

For an individual who is moving out of India to take up employment, the 60-days rule is relaxed and replaced with a 182-days rule. In such cases, an individual leaving India for employment in a foreign country may qualify as a non-resident of India during the said financial year and will be taxed in India on Income received/accrued in India.

Generally, due to the lack of knowledge about the tax laws, Individuals travelling for work outside India are unable to correctly determine their Indian residential status and taxability and assume that income from foreign employment is not taxable in India. The same is not true in many cases. 

The provisions under the Exchange Control Law for residency are different and the banks may want to designate an Individual’s bank account as an NRE/ NRO account, which adds to the confusion for those who are not well-versed with the tax and foreign exchange laws. It also changes their eligibility to remit money outside India.

While working outside India, individuals need not contribute to the social security scheme of that country if India has signed a Social Security Agreement with that country and the individual has obtained a Certificate of Coverage from the Employees’ Provident Fund Organisation.

For more information on India’s tax regime for individuals, please consult your regular BDO contact or the author of this article.

Preeti Sharma
BDO in India
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