Budget proposes tax on EPF interest

What is the News?

The government has proposed to make the interest earned on EPF contributions beyond ₹2.5 lakh Taxable.

Why has this proposal been made?

• The government has found instances where High Net Worth Individuals(HNIs) are contributing huge amounts to EPF. They are getting the benefit of tax exemption at all stages — contribution, interest accumulation, and withdrawal.
  • Example: In 2018-19, ₹62,500 crores were deposited into EPF accounts by HNIs. The largest EPF account has a ₹103 crore balance.
• Hence, this proposal is aimed to exclude high net-worth individuals(HNIs) from the benefit of high tax-free interest income on their large contributions.

Employee Provident Fund(EPF) Scheme:

• 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 both on retirement.
• Limit on Employer’s Contribution: In Budget 2020, the government had capped the contributions by employers into funds EPF or the National Pension Scheme at ₹7.5 lakh a year.
  • However, government, as well as private-sector employees, are allowed to make voluntary contributions over and above the statutory deductions into the general provident fund(GPF) or EPF respectively.

Source: The Hindu