The New EPF Tax Rules Should be Re-examined

Synopsis: A new EPF Tax Rules under EPF(Employees Provident Fund) contributions is under the proposal. The intended objective is to prevent abuse of process by HNIs (High net individuals), however, there are some concerns that demand re-examination.

  • Before the budget announcement, the EPF contributions were taxable beyond the permissible tax-free limit (1.5 lakh per annum) under Section 80C of the Income Tax Act. 
  • However, there was no tax on interest income earned on such contributions except in the case of premature withdrawals (before 5 years).
What changes have been made?
  • The finance bill 2021 was passed with 127 amendments.
  • This included a proposal to tax the interest earned on EPF contributions beyond Rs. 2.5 lakh rupees.
  • The limit is 5 lakh in cases where employers do not make contributions to the provident fund.
The rationale behind the proposal:
  • It intends to prevent abuse of process by HNIs who was getting the benefit of tax exemption at all stages — contribution, interest accumulation, and withdrawal.
    • Example: More than 20 accounts in EPF hold a balance of around 800 crores which is completely New EPF Tax Rules.
  • Further, the move will not harm other contributors as 90% of them contribute less than 2.5 lakh.
Concerns with New EPF Tax Rules :
  • Complexity – Earlier the process was simple and easy to understand. But now the taxation of interest makes it difficult to ascertain the retirement amount.
    • It is also unclear if the interest on such excess contributions is to be taxed once during the year of contribution or throughout the term of investment in EPF. 
    • The mechanism of tax communication from the EPFO to the member also remains uncertain. 
  • Double Taxation: Contribution above 1.5 lakh is already taxable under the Income Tax act. Taxing interest over 2.5 lakh contribution can lead to double taxation. 
  • Regressive View: The government is treating more investment by the rich as a regressive move that would do only evil. 
    • A greater contribution is helpful considering the medical cost, inflation, volatile interest rate cycles, and minimal choices for post-retirement investments.
    • Further, corporates earn from a mix of government securities and market instruments. The government gives them no subsidy towards EPF. 
  • Ignore the safety potential: The new rules ignore the safety of investment under EPF. It is the government backing that induces greater investment rather than a desire to abuse the tax concessions under the instrument. 
Way Forward:
  • Reconsideration of tax proposals is desired so that EPF remains the primary retirement saving instrument for people owing to its attractive nature and not by compulsion.
  • Further systems at EPFO will require changes as taxation of the annual interest rate is a new concept for the organization.
EPF (Employees Provident Fund):

  • EPF is a social security scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act,1952
  • Managed by: The scheme is managed under the aegis of Employees’ Provident Fund Organization (EPFO).
  • Coverage: EPF accounts are mandatory for employees earning up to ₹15,000 a month in firms with over 20 workers.
  • Contribution: Under the scheme, an employee has to pay a 12% contribution towards the scheme. An equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer’s contribution with interest on retirement.
  • The employees can transfer contributions from one employer to another with the support of the Universal Account Regime. Withdrawal is possible only after permanent cessation of employment. 

Source: The Hindu 

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