RE-EXAMINING THE EPF TAX RULES

Context:

An important announcement regarding provident fund has been made in the Union Budget 2021 by Finance Minister that interest on employee contributions to provident fund of over Rs 2.5 lakh per annum would be taxed, starting from April 1, 2021.

Relevance:

GS-III: Indian Economy (Economic development and growth, Government Policies and Initiatives, Issues with the design and implementation of policies)

Mains Questions:

In the context of the recent changes made in the Union Budget 2021, what are the reasons for taxing Interest Income on Provident Fund (PF) Contributions? How does this move help to promote equity amongst PF Contributors? (10 Marks)

Dimensions of the Article:

1. What is Employee Provident Fund (EPF)?
2. Employees Provident Fund Organisation (EPFO)
3. Understanding the recent Proposed Tax on Income from PF
4. Reasons for Taxing Interest Income on PF Contributions

What is Employee Provident Fund (EPF)?

• Employee Provident Fund (EPF) is a retirement savings scheme that the government of India has mandated for all salaried employees.
• In simple words, it is a savings platform provided by the government to help the employees build a corpus for post-retirement life.
• EPF is the main scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952.
• The funds deducted from the salary as PF goes to the PF account, which is maintained by the Employee Provident Fund Organization (EPFO).
• The Employee Provident Fund is open for employees of both the Public and Private Sectors.
• All organizations in India that have more than 20 employees, as per law, is mandated to register with EPFO.
• Both employer and employee contribute 12% of an employee’s monthly salary (basic wages plus dearness allowance) to the Employees’ Provident Fund (EPF) scheme.
• EPF scheme is mandatory for employees who draw a basic wage of Rs. 15,000 per month.
• This savings scheme offers tax exemption under Section 80C of the Income Tax Act.

Employees Provident Fund Organisation (EPFO)

• EPFO is a Statutory Body, formed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.
• EPFO is under Union Ministry of Labour & Employment.
• The EPFO has the dual role of being the enforcement agency to oversee the implementation of the EPF & MP Act and as a service provider for the covered beneficiaries throughout the country.
• The EPF interest rate is declared every year by the EPFO.
• EPFO assists the Central Board in administering a compulsory contributory Provident Fund Scheme, a Pension Scheme and an Insurance Scheme for the workforce engaged in the organized sector in India.
• It is also the nodal agency for implementing Bilateral Social Security Agreements with other countries on a reciprocal basis.
• The schemes cover Indian workers as well as International workers (for countries with which bilateral agreements have been signed.
• The EPFO’s apex decision making body is the Central Boad of Trustees (CBT).

Understanding the recent Proposed Tax on Income from PF

• Only interest income on annual PF deposits of over Rs 2.5 lakh will be taxed. – If the aggregate contribution to EPF and Gratuity and the voluntary contributions to EPF exceeds Rs 2.5 lakh, the interest income on that will be taxed at the marginal tax rate in which the income of the individual falls.
• The move is aimed at taxing high-value depositors in the Employees Provident Fund.
• As per the new norm, government’s decision only applies to the employees’ side of contribution.
• The big-ticket money which comes into the fund and gets tax benefit as well as assured about 8% returns that would come under the tax ambit.
• The interest income on the additional contribution of a year will get taxed every year. This means that if an individual’s annual contribution to PF in FY22 is Rs. 10 lakhs, the interest income on Rs 7.5 lakh will get taxed not only for FY22 but also for all subsequent years.

Reasons for Taxing Interest Income on PF Contributions

• The government has defended its decision, saying that many people put huge sums of money annually towards EPF and earn interest income from it without having to pay any tax. An anomaly is created due to this, according to the finance minister.
• The government has found instances where some employees are contributing huge amounts to these funds and are getting the benefit of tax exemption at all stages – contribution, interest accumulation and withdrawal.
• Since any tax exemption is provided through taxpayers’ money, it was unfair to allow High Networth Individuals (HNIs – people with investable assets above a certain figure) depositing large sums in EPF to earn an assured interest (under EPFO) and tax-free income together.
• Earlier, the government had capped the contributions by employers into employee welfare schemes like the EPF or the National Pension Scheme or a superannuation plan, at Rs. 7.5 lakh a year.
• However, government as well as private sector employees are allowed to make voluntary contributions over and above the statutory deductions into the general provident fund (available only for government employees) or EPF (available for government as well as private sector employees).
• Of an estimated 4.5 crore EPF accounts, about 0.27% members had an average corpus of Rs. 5.92 crore and were earning over Rs. 50 lakh a year as “tax-free assured interest”. This is a misuse of the welfare scheme aiming to promote savings and provide social security to lower- and middle-income groups of employees.

-Source: The Hindu