The Centre would do well to raise the tax-free PF contribution limit to ₹5 lakh for all employees
One of the trickier public policy challenges in India is to ensure that the benefits of social security schemes reach the deserving citizens and are not appropriated by the undeserving. The Centre’s attempt to curb the rich from leveraging on the high tax-free returns in the Employee Provident Fund (EPF) should be seen in this context. While the Centre’s intent is appreciable, it is important to also take care that such proposals don’t end up inadvertently hurting the middle-income earner, who is creating her retirement nest-egg through the EPF. This is the risk with the Budget proposal — now enshrined as law — to restrict tax-free interest earned on recognised provident funds (including EPF) to annual contributions of up to ₹2.5 lakh. In her reply to the debate on the Finance Bill in Parliament, Finance Minister Nirmala Sitharaman announced that the limit has been increased to ₹5 lakh in cases where the fund has ‘no contribution by the employer’. The main beneficiaries of this appear to be government employees. Even as this tweak is subject to varying interpretations, the purpose of these unequal limits seems to be to level the playing field between government employees (whose employer does not contribute to the general provident fund ) and private sector employees who receive employer contributions in addition to their own contribution. Super-rich citizens exploiting the EPF certainly need to be discouraged, but by pegging the tax-free contribution limit at just ₹2.5 lakh the Centre is being unfair to those who look upon the EPF as their retirement security.
Data shared by officials have suggested that the real problem lies with the 1.23 lakh EPF subscribers who have accumulated ₹62,500 crore in their accounts and are pocketing tax-free interest of 8 per cent plus on these huge balances. This is indeed a shocking piece of statistic, but while trying to slam the door on these undeserving subscribers, the Centre should ensure that it does not hurt the deserving. A contribution limit of ₹5 lakh for all appears to be a fair demand.