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Discrimination in taxing provident fund (PF)

Synopsis: The Finance Minister has enhanced the Provident Fund(PF) limit up to 5 lakhs from the previously proposed 2.5 lakh. This is a discriminatory proposal for taxing PF and should be reconsidered.

Background:
  • The finance bill 2021 was passed with 127 amendments. This included a proposal to tax income on PF contributions over Rs. 2.5 lakh rupees a year. 
    • The rationale behind this was to prevent abuse of the process as 93% of users fall below 2.5 lakh category.
  • Recently, a contradictory provision of doubling the annual threshold to Rs. 5 lakh was also introduced. This enhanced limit was given to only those individuals whose employers do not remit any contribution to their retirement fund account. 
Current Threshold limits for Provident Fund:
  • Annual investments made into individual PPF accounts are capped at  Rs. 1.5 lakh per year. 
  • EPF contributions beyond 1.5 lakh are not tax-deductible under Section 80C of the I-T Act. However, income on such contributions beyond 2.5 lakh will be taxable.
  • Similarly, employer contributions into the EPF, NPS, or any superannuation pension fund can’t exceed 7.5 lakh per year. 
  • Income on GPF(General Provident Fund) contributions would be tax-free up to 5 lakh per year.
Concerns with such a move
  • Firstly, it amounts to discrimination with private employees who have an EPF (Employees Provident Fund) account as:
    • Employer-employee relationship is an implicit requirement to open an EPF account.
    • Employees can contribute beyond the statutory wage limit of Rs. 15,000 but employers contribution can never reach zero.
  • Secondly, it suggests a bias in favor of some government employees as:
    • Only some senior government staff who joined service before 2004 and are not part of the NPS will benefit from this move. 
    • They possess a unique profile that allows them to contribute to the GPF account and get a defined benefit pension separately.
  • Thirdly, it move also conflicts with other policy measures like Wage Code Bill.
    • The calls for enhancing employers contribution in EPF accounts. This may make EPF contribution cross the 2.5 lakh limit thereby coming under the tax net.
  • Lastly, it shows a disconnect between policymakers and the aspirations of the working class to save for their retirement years. It appears that the government is willing to jeopardize the retirement benefits for augmenting tax collections.
Way Ahead:
  • The government could offer the same cap of 5 lakh annual contribution to EPF account holders in order to bring equity. For capping the annual amount, employers’ contributions can be counted as well.
  • Until this is done, the government can put the new tax structure on hold and think through its implications.

India possesses a huge informal workforce that must be given equitable retirement benefits like the government sector employees.

Source:  The Hindu

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