The government was pushed into putting restrictions on tax free interest earnings on employees' contribution to various provident funds in this year's Budget after a scrutiny of accounts revealed that certain high networth individuals (HNIs) were using the saving scheme to pump money running into hundreds of crores to escape paying taxes and get assured returns.
Sources in the Department of Revenue said the scrutiny of accounts brought out interesting facts about certain HNIs where one of the highest contributors has more than Rs 103 crore in his provident fund account followed by two second highest ones having more than Rs 86 crore each.
The top 20 HNIs whose records were seen had about Rs 825 crore in their accounts while top 100 HNI contributors have more than Rs 2,000 crore.
Presenting the Budget 2021-22, Finance Minister Nirmala Sitharaman said that in order to rationalise tax exemption for the income earned by high income employees, it is proposed to restrict tax exemption for the interest income earned on the employees' contribution to various provident funds to the annual contribution of Rs 2.5 lakh. This restriction shall be applicable only for the contribution made on or after April 1, 2021.
The budget proposal evoked sharp reaction from a cross section of individuals who saw the move a disincentive to save, especially for middle income earners having limited avenues of savings and investment providing tax relief as well as assured returns of close to 8 per cent.
Department of Revenue sources said that the aim of changes proposed in the Budget was to remove disparity among contributors and to ensure that the HNIs who park huge sums of more than a crore of rupees per month to misuse and game the provision of assured high interest are checked and do not distortedly earn at the cost of other honest taxpayers' money.
There are more than 4.5 crore contributors' accounts to Employees' Provident Fund. Out of these, more than 1.23 lakh accounts are of the HNIs who contribute monthly very huge sums to their EPF accounts. Their total contribution is to the tune of Rs 62,500 crore as of now.
The HNI contributors who are 0.27 per cent of the total number of EPF account holders have, on an average, a corpus of Rs 5.92 crore per person and thereby were earning very huge sum at the rate of Rs 50.3 lakh per such person per annum as tax free assured interest in a very scheming manner at the cost of the salaried class and other taxpayers, sources quoted earlier said.
The decision to remove the tax exemption on provident fund contributions of Rs 2.5 lakh and above in the budget, said the sources, thus was based on the principle of equity among the contributors.
Sources reiterated that 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 wrongfully tax free income as assured interest return, adding that average normal EPF or GPF contributor would not be affected by the removal of anomaly in the system prevailing over a long period of time.