Pvt PF & superannuation funds' equity returns set to be tax-free
December, 11th 2008
The returns earned by private provident funds
and superannuation funds from their investments in shares of companies will not attract
tax as the government plans to give such investments tax-free status, according to finance ministry officials.
The finance ministry, which has allowed the entities to channelise up to 15% of their corpus in equities, is now set to amend the income-tax rules to facilitate this. The tax-free status would allow more of retirement savings to flow into shares, which over a long period earn higher returns those other assets.
Private sector companies having more than a certain minimum number of employees can seek permission to manage the retirement savings of their employees instead of giving the corpus to the Employees Provident Fund Organisation, a government entity.
The Central Board of Direct Taxes (CBDT) is likely to carry out necessary changes in the income-tax rules to allow private provident funds and superannuation funds to allow their equity investments tax-free status. A finance ministry official, who did not wish to be identified, said the change in rule could be done through a notification and would not require an amendment in the Income Tax Act. A change in the Act can be effected by way of the legislative process, through the Finance Act in the Budget.
The department of economic affairs (DEA) under the finance ministry had notified new norms for private provident fund trusts in August this year, permitting them to invest up to 15% of their corpus in the stock market instead of the earlier 5%. The new investment pattern comes into effect from April 1, 2009. The department of economic affairs has now written to the CBDT asking it to carry out amendments in its income-tax rules.
Income-tax rule 67 prescribes an investment pattern for private provident funds and superannuation funds which is to be followed to avail tax benefits: income earned on investments that fall outside the pattern prescribed is liable to tax. Therefore, in absence of the tax-free status, even though a higher allocation for equities is allowed, the returns would have been subject to tax.
The official said that although most of the significant changes in the income-tax laws are made through the Finance Act, the CBDT will not wait for the Budget to effect the amendment. With the present governments term ending in May, there may not be a full-fledged Budget 2009. The new investment norm prescribed by the DEA will come into effect from April 1 and trusts following it will not be able to avail tax benefit since it would be in deviation of the income-tax guidelines.
The move to allow tax benefit for equity investments by private provident funds and superannuation funds would facilitate more retirement savings to flow into the stock market and help it deepen further.