Amid backlash over the Budget proposal to tax the interest earned from provident fund contribution of over Rs 2.5 lakh a year, the government on Thursday reiterated that the move is aimed at preventing high-net-worth individuals (HNIs) depositing large sums “in a scheming manner” at the cost of salaried class taxpayers to earn assured and tax-exempt returns.
While HNI contributors account for just 0.27 per cent of the employee’s provident fund (EPF) accounts, they have an average corpus of Rs 5.92 crore per subscriber, earning Rs 50.3 lakh per person per annum as tax-free, said sources in the Department of Revenue.
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. The top 20 HNIs have about Rs 825 crore in their accounts, while top 100 HNI contributors have more than Rs 2,000 crore. There are more than 45 million contributor accounts in EPF, of which more than 123,000 are of HNIs. Their total contribution is to the tune of Rs 62,500 crore for FY 2018-19 and the government is paying an assured interest at the rate of 8 per cent with tax exemptions.
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“This has been done with a purpose to remove disparity among contributors and to put a stop to HNIs parking sums of over Rs 1 crore per month and earning tax-free interest,” said the source.
In the Budget, it was announced that Rs 2.5 lakh a year is the deposit limit for EPF on which interest earned won’t attract any tax. Above this, the return will be taxed at the prevailing income tax rate.
“Since any tax exemption is provided through taxpayers’ money, it was unfair to allow a small group of HNIs to misuse a welfare facility and earn tax-free income as assured interest return. An average EPF or General Provident Fund contributor would not be affected by the removal of anomaly in the system prevailing over a long period of time,” the source added.
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