Provident fund withdrawal taxable? | Premature withdrawal of PF taxable?

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EPFO Faces Rs 7K Cr Tax Demand on Early Fund Withdrawals :
The Income-Tax (I-T ) department has slapped a tax demand on the Employees Provident Fund Organisation (EPFO) the custodian of 5.87 crore workers retirement savings.
The tax assessment,served on two PF offices for failing to tax premature withdrawals by workers,would translate into a tax liability of around Rs 7,000 crore for all PF offices from 2007-08 to 2009-10.The move also means that all early withdrawals by workers from their PF savings would now be fully taxable.Tax officials have cited a rule in the 1961 Income-Tax Act that taxes PF withdrawals by employees before completing five years of contributions into the EPF.The EPFO has never enforced the rule meant to ensure parity in the tax treatment of all longterm savings like the public provident fund.
Company-run PF trusts,however,adhere to the I-T rules.If interpreted to its fullest implications,the tax authorities decision could make employers liable for paying fringe benefit tax on contributions into the employees pension scheme (EPS) which are paid back to workers availing early withdrawals.Employers currently enjoy a tax break on contributions made to the EPFO at 12% of workers salary of which 8.33% goes into the EPS.A matching contribution of 12% is deducted from workers pay towards their PF accounts.As per the I-T department diktat,contributions as well as interest on PF accumulations are taxable in the case of premature withdrawals.Central Provident Fund Commissioner Samirendra Chatterjee confirmed that the IT department could trigger huge tax liabilities for EPFO.
We are filing a writ petition in the Delhi HC to quash the I-T departments order, the CPFC said.Our mandatory salary ceiling for PF coverage is Rs 6,500 per month.How can we tax a worker who doesnt even fall under the taxable annual income bracket of Rs 1.8 lakh he asked.Our stand is that EPF savings are not taxable under the EPF Act of 1952, Chatterjee stressed.If at all tax has to be levied,it has to be the employers responsibility as they are aware of workers total incomes while we may not know even if they are paid more than Rs 6,500 per month, he said.
Source; Economic times
 
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