NEW DELHI: Finance Minister Nirmala Sitharaman has proposed to tax the Employees’ Provident Fund (EPF), albeit only the interest income on contributions exceeding Rs 2.5 lakh in a year from April 1. It will also be applicable for GPF contributions, i.e. for government employees.
“Any contribution you are making to Provident Fund, that is in excess of Rs 2.5 lakh, will be in a separate basket and interest on that corpus will be taxable. It will work in the same manner as the interest income on fixed deposits is taxed,” Kamlesh Varshney, joint secretary, tax policy division at the Central Board of Direct Taxes said at a post-Budget session organised by industry body Assocham.
While this has caused concern to salaried people contributing to EPF, let’s have a look at who will be impacted by the move.
Who will be impacted?
Tax experts claim that if your current basic salary is below Rs 1,04,167, then you may not be impacted. However, if your salary is above this you will end up paying tax on interest earned on your extra EPF
Basically, if your monthly contribution is more than Rs 20,833, you will have to pay tax on the interest earned on your contribution.
In case employees are opting for equal VPF contribution, in this scenario you will not be impacted if your basic salary is Rs 52,083 or below.
However, if your basic salary is more than this, you will either have to reduce your VPF contribution or end up paying taxes.
The impact of this move will be more visible when the new wage code comes into effect from April 1 this year. As per the new code, the base ‘salary’ is expanded on which EPF contribution is calculated.
The 12 per cent EPF will then be calculated as a percentage of a larger base ‘salary’ and therefore the annual EPF contribution for many will go up. This will particularly affect those who have lower
basic salary but higher total remuneration.
Rationale behind the move
Sources from CBDT say that many High Networth Individuals (HNIs) were misusing PF provision. They were deducting a major portion of their salary to PF in order to get benefits of high tax-free interest.
“There are more than 4.5 crore EPF contributors, of which more than 1.23 lakh accounts belong to HNIs who have been parking huge sums on monthly basis. As of FY19, HNI’s contribution was Rs 62,500 crore. One of the highest contributors, for instance, had a balance of Rs 103 crore in his PF account, while another held more than Rs 86 crore. The top 20 HNIs have about Rs 825 crore in their accounts, while the top 100 have a balance of over Rs 2,000 crore. The purpose of making tax-free contributions was for tax free retirement corpus and not for tax evasion,” the official explained.