News: Tax on provident fund interest aimed at HNIs: Govt-05-02-2021

https://www.financialexpress.com/money/tax-on-pf-interest-aimed-at-hnis-govt/2188092/

Sources said that the top 20 HNIs have about Rs 825 crore in their accounts while top 100 have contributed above Rs 2000 crore.

The proposal to tax interest income from provident fund contribution above Rs 2.5 lakh is aimed at a small fraction of accounts held by high net worth individuals (HNIs) who have deposited nearly Rs 62,500 crore in their accounts.

Of the 4.5 crore EFP accounts, just over 0.27% (1.23 lakh) contributors are misusing the provision, sources said. Many of these accounts witness deposits in several crore of money every month with the highest account balance being Rs 103 crore followed by two accounts of Rs 86 crore each, the data available with sources showed.

“The Budget decision was based on the principle of equity among the contributors as a small group of HNIs have been deriving benefits of an assured 8% interest rate on large sums of money at the cost of average account holder,” a source said. He added that average employees’ provident fund (EPF) or government provident fund (GPF) contributor would not be affected by the removal of anomaly in the system prevailing over a long period of time.

Sources said that the top 20 HNIs have about Rs 825 crore in their accounts while top 100 have contributed above Rs 2000 crore. This works out to be an average corpus Rs 5.9 crore per person in the HNI category, which yields an interest income of Rs 50.3 lakh per account annually.

The Budget proposal means that the interest earned on the part of provident fund contribution that is above Rs 2.5 lakh would be added to the total income of the taxpayer, which is usually taxed at the rate corresponding to the tax slab applicable for the income.

“Instances have come to the notice where some some employees are contributing huge amount to these (provident) funds and entire interest accrued/received on such contributions is exempt from tax under clause (11) and clause (12) of section 10 of the Act,” the memorandum to the Budget proposal said.

It added that the exemption, without any threshold, benefits only those who can contribute a large amount to these funds as their share, and hence the law is now altered to tax the interest income accrued during the previous year. The new clause would come into effect from April 1 this year.

“The contribution to the provident fund that is in excess of Rs 2.5 lakh would be in a separate basket and interest on that particular corpus would be taxable,” Kamlesh Varshney, joint secretary of tax policy and legislation unit of CBDT, said on Wednesday at a discussion of industry body Assocham.