The proposal to tax PF contribution over a certain limit is retrograde
The 2021-22 Budget is notable for not imposing fresh taxes, but for one clause lurking in its fineprint. This is the plan to withdraw the tax exemption on the interest income earned by employees’ provident fund contribution exceeding ₹2.5 lakh a year. The Employees Provident Fund (EPF) is one of the very few savings products in India that still enjoy an exempt-exempt-exempt (EEE) regime, that is contributions, interest and withdrawals are all exempt from tax. The proposed change now may prove a significant deterrent to employees using it as their default retirement vehicle. While the memorandum claims that the cap became necessary because some employees were found to be ‘contributing huge amounts’ to their provident funds, the Centre ought to introspect whether this is such a bad thing.
To help employees plan, the Centre must reveal its long-term roadmap for the three retirement vehicles (EPF, PPF and NPS) without attempting piecemeal changes. Higher-income folks can be persuaded to explore non-EPF avenues, if retirement accounts are carved out from the crowded section 80C and deduction is raised to, say ₹2.5 lakh. The compulsory annuity rule on the NPS must also be done away with.