Budget 2020: Saving for retirement to become taxing for high-income earners

Khyati Dharamsi

Those earning relatively high incomes and building a retirement kitty, need to get back to their cost-to-company data sheets and assess whether their employer is contributing more than Rs 7.5 lakh towards their provident, superannuation funds or the New Pension Scheme (NPS).

The finance minister has proposed taxing any amount contributed to these retirement savings instruments in excess of Rs 7.5 lakh from April 1, 2021.

Taxing retirement contributions

“Any aggregate contribution by employers of more than Rs 7.5 lakh to a superannuation or provident fund or the NPS would be taxed. This would affect the high-income earners whose contributions exceed this cap,” says Homi Mistry, partner at Deloitte India.

The explanation given in the Finance Bill 2020 states that the motive was to restrict the benefit being accrued to employees by way of perquisites.

“So, if someone who is earning Rs 80 lakh as basic salary and the employer is contributing 10 per cent of the amount to provident fund (Rs 8 lakh), he/she would have to pay tax on the additional Rs 50,000 (Rs 8 lakh employer’s; Budget 2020 cap of Rs 7.5 lakh),” clarifies Ameet Patel, partner at Manohar Chowdhry & Associates.

High-income earners would thus have to get back to the drawing board to rejig their salary structure to avoid the additional tax burden. “The government is trying to restrict the social security net,” says Patel.