Tax on EPF contributions of over Rs 2.5 lakh a 'corrective step', will not impact normal subscribers

The proposal in union budget to impose a tax on interest earned on Employees' Provident Fund or Government Provident Fund (GPF) on the contribution of Rs. 2.5 lakh and above in a year is aimed at addressing "a serious anomaly" and prevent a small group of High Networth Individuals (HNIs) "from misusing a welfare facility".

The sources said the proposal is aimed at removing disparity among contributors and to ensure that HNIs, who park huge sums of more than one crore rupees per month "to misuse and game" the provision of assured tax-free high interest, are checked and do not earn distortedly at the cost of other honest taxpayers, a source in the Department of Revenue (DoR) said.

The sources said the normal EPF or GPF contributor would not be affected by "the removal of an anomaly in the system prevailing over a long period of time".

They said there are more than 4.5 crore EPF accounts. Of these more than 1.23 lakh accounts belong to HNIs who contribute huge sums monthly. Their total contribution was to the tune of Rs 62,500 crore for FY 2018-19 and the government owes or pays an assured interest at the rate of 8 per cent with tax exemptions to these high-income category persons, the sources said.

The sources, who did not divulge any names, said that one of the highest contributors has more than Rs 103 crore in his account followed by two who have more than Rs 86 crore each.

Sources said top 20 HNIs have about Rs 825 crore in their EPF accounts while the top 100 HNI contributors have more than Rs 2000 crore.

Sources told the HNI contributors are 0.27 per cent of total EPF account holders and have on average a corpus of Rs 5.92 crore per person. They said these HNIs were earning a huge average return of Rs 50.3 lakh annum and it is tax-free.

The sources said that the decision to remove the tax exemption on provident fund contributions of Rs 2.5 lakh and above in the budget, was based on the principle of equity.

Sources said any tax exemption is provided through taxpayers' money and it was unfair to allow a small group of HNIs to "misuse a welfare facility and earn tax-free income as assured interest return".

They said the normal EPF or GPF contributor would not be affected by "the removal of an anomaly in the system prevailing over a long period of time".

( With inputs from ANI )