Finance Ministry defends EPF’s tax-free thresholds

The Finance Ministry has strongly defended its decision to grant a higher tax-free threshold of ₹5 lakh for Provident Fund contributions by government employees, compared to private sector workers whose income on annual contributions beyond ₹2.5 lakh will be taxed from this year.

“I would like you to clarify this. There are two ways the contribution can be made — by the employer and by the employee. In case where the contributions are made by both of them, the employers’ contribution up to ₹7.5 lakh is exempt and for employees, it’s ₹2.5 lakh. So the total threshold for private sector employees is at ₹10 lakh,” Revenue Secretary Tarun Bajaj explained.

“For the government (or for such) funds where only the employee is contributing, we have put a threshold only of ₹5 lakh. So, in fact, it’s the other way round,” he said, stressing that private sector employees with higher salaries can have a contribution up to ₹10 lakh a year into their EPF accounts with tax-free interest, while those who only contribute themselves face a threshold of ₹5 lakh.

Mr. Bajaj also asserted that it was incorrect to suggest the tax on EPF income amounted to double taxation as contributions beyond ₹1.5 lakh are made from tax-paid income. Section 80C limits tax breaks on employees’ PF contributions along with other similar savings instruments to ₹1.5 lakh per year, so some experts have pointed out that a part of EPF contributions beyond ₹1.5 lakh will face taxation at the contribution stage and savings beyond ₹2.5 lakh will be taxed at the income stage as well.

“I think that’s a wrong interpretation. We are not taxing your contribution; we are taxing the interest income on your contribution. When you invest in FDs, when you invest in shares, when you invest in company deposits, you are doing the same thing. You are taxed for your income there also,” he pointed out.

“It is quite possible that one has put ₹1.5 lakh in EPF, ₹1.5 lakh in an insurance policy, and then ₹1.5 lakh in PPF also. Then he doesn’t get any benefit under PPF. Basically, anything you invest is from your tax-paid income only, but the interest on that will be taxed as that is again your income,” the Secretary said.

Asked if the government had plans to revise the taxation threshold for income on PF contributions based on inflation levels in the coming years, Mr. Bajaj said, “Let’s see. Only future will tell.”

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Printable version | Aug 12, 2022 9:29:34 pm |