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Taxing PF Contribution of More Than 2.5 Lakh Was A Corrective Step: Sources

The EPF scheme was a tax safety net for private salaried employees who have no access to savings

The government’s decision to tax interest earned on Employees’ Provident Fund of Rs 2.5 lakh and above a year was based on the principle of equity among the contributors and aimed at ensuring that high networth individuals (HNI) who park huge sums of more than a crore of rupees per month do not earn at the cost of other honest taxpayers’ money, according to sources in the Department of Revenue. A total of 99 per cent of the EPF-registered members average 2.5 lakh or less, and stand to benefit from the tax exemption provided to those whose contribution is less than Rs 2.5 lakh.

In her budget 2021 announcements, the finance minister had proposed that interest earned on employee’s contribution above Rs 2.5 lakh in a year will become taxable in the hands of the employee. The EPF scheme was proposed as a tax safety net for the private salaried employees who have no access to savings after retirement or quitting a job.

The high-networth individual contributors, constituting 0.27 per cent of the total number of EPF account holders, had an average corpus of Rs 5.92 crore per person and ended up earning a huge sum at the rate of Rs 50.3 lakh per such person per annum as tax-free assured interest. These earnings come at the cost of the salaried class and other taxpayers.

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As any tax exemption is provided through taxpayers’ money, sources said that it was unfair to allow a small group of high-networth individuals to misuse a welfare facility and earn tax-free income wrongfully, adding that normal EPF account holders would not be affected through change in the rules.

The Employees Provident Fund reportedly has more than 4.5 crore contributors’ accounts. Out of these, over 1.23 lakh accounts belong to high-networth individuals who contribute huge sums of money on a monthly basis and their total contribution is estimated at Rs 62,500 crore. The top 20 high-networth individuals reportedly have about Rs 825 crore in their accounts, while top 100 HNI contributors have more than Rs 2,000 crore.


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