Maintaining continuity and stability in taxation, simplifying and rationalizing various provisions to reduce the compliance burden, promoting an entrepreneurial spirit and providing tax relief to citizens were some of the objectives of Budget 2023.
Budget announcements inter alia included amendments to provide relief to salaried taxpayers withdrawing their provident fund balance or receiving leave encashment from their employers.
TDS on withdrawal of Provident Fund balance
The law provides for tax to be deducted at source on payment of accumulated PF balance due to an employee at the time of withdrawal if the period of contribution is less than 5 years.
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TDS is required to be deducted at the rate of 10 percent on the accumulated balance due to an employee if the payment is not less than Rs. 50,000.
The employee is required to furnish his Permanent Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be levied at the maximum marginal rate.
Budget proposals acknowledged that many low-paid employees may not have a Permanent Account Number (PAN), which has resulted in tax being deducted at the maximum marginal rate in their cases, resulting in hardship.
The Budget has proposed that in case of failure to furnish PAN, tax will be deducted at the rate of 20 percent as is the practice in non-PAN cases, instead of at the maximum marginal rate. This amendment will take effect on April 1, 2023.
Also read | What Budget 2023 has for individual taxpayers
Increase in notified exemption limit on leave encashment
The current law provides for taxation of leave encashment received by employees while in service.
The leave encashment received by employees of central or state governments at the time of retirement, whether upon superannuation or otherwise, is exempt from tax.
Based on various judicial precedents, the exemption is also available in case of voluntary retirement or on account of resignation.
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The exemption provided to other employees upon retirement (or resignation as explained above) is presently capped at the lower of the following.
• Actual amount received
• Last ten months average salary (basic salary and dearness allowance)
• Amount computed considering maximum 30 days leave for every year of service
• Amount notified by the central government i.e., Rs. 3 lakh
The limit of Rs 3 lakh is for the entire service period of an employee with multiple employers. The limit was last fixed in 2002, and due to a general increase in salary levels, it is proposed to increase the limit to Rs. 25 lakh.
This will benefit employees in terms of tax savings. The proposal to increase the amount shall be notified separately and does not find a mention in the Finance Bill.
Both announcements made by the government are welcome steps to reduce the tax burden of the salaried class.
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