While investments into tax-saving small saving schemes like the Public Provident Fund are restricted to Rs 1.5 lakh a year, it is possible for employees to top up their EPF and GPF contributions beyond that limit. Though such investments don't lower an individual’s taxable income beyond the Rs 1,50,000 allowed annually under Section 80 C of the Income Tax Act, the interest earned on them remains tax-free.
The GPF is offered to government employees, while EPF benefits are mandatory for all organisations with 20 or more employees earning upto Rs 15,000 a month. Those earning over the Rs 15,000 ceiling can contribute to EPF on a voluntary basis.
“The revenue department in the finance ministry is keen on introducing penalties of some sort on such investments this time,” said a top government official aware of the deliberations on the matter in the run up to the Union Budget. “One alternative being considered is to offer a lower interest rate on investments over Rs 1.5 lakh,” he said.
This is part of a fresh attempt by the finance ministry to change people’s investment preferences and nudge them towards the relatively new National Pension System (NPS) administered by the Pension Fund Regulatory and Development Authority (PFRDA).
The PFRDA currently has assets of Rs 1.10 lakh crore under its watch and reports to the finance ministry, while the Employees’ PF Organisation works under the labour ministry and has over Rs 10 lakh crore under its administrative control.
“The finance ministry is trying to promote the NPS and downgrade EPF. In the last Budget, it introduced an additional Rs 50,000 tax deduction for investments into NPS, after exhausting the Rs 1.5 lakh limit under section 80 C,” the official pointed out.
However, experts said that penalising people for investing more in EPF or GPF is not a good idea and it would be unfair to deprive an investor of the income that accrued on his investments. EPF savings are pooled and deployed in various instruments, including government debt.
“The returns on EPF savings involve no largesse from the government. They pay out what they earn on their portfolio,” said a senior EPF official who stressed that the EPFO’s trust has a fiduciary responsibility towards its members, as defined in the Indian Trusts Act.
“In last year’s Budget, the government said it will use Rs 6,000 crore of unclaimed deposits lying in EPF accounts to subsidize new social security schemes for senior citizens. This hasn’t been implemented, precisely because it is not legally tenable to forfeit an employee’s savings just because he hasn’t turned up to claim it,” the official pointed out.
Since 2011, the government stopped paying interest on EPF accounts that were idle for three years. The money parked in these accounts continues to earn income, but it hasn’t been used to raise the EPF rate payouts for other members owing to similar considerations about whether this would be legally permissible.
“This is not a good idea. In a country where pensions mean different things to different people, policy shouldn't play favourite between instruments of social security. The Government should not have an instrument bias, especially when asset allocation of these options is going through a period of convergence,” said Amit Gopal, senior vice president at India Life Capital.
A part of EPF savings are invested into the stock market since August 2015, just like the NPS has been offering to its investors. Mr Gopal said it would be imprudent and impractical to offer differential rates for EPF savings upto Rs 1.5 lakh and those beyond.
PFRDA chairman Hemant Contractor said that some of the growth in NPS accounts, which grew from 87 lakh in March 2015 to 1.15 crore by this month, could be attributed to this tax sop that takes the tax-deductible investments under NPS to Rs 2 lakh a year.
Mr Contractor also welcomed any move by the government to improve the tax treatment for NPS investments that are currently taxable at the time of retirement as opposed to EPF savings that are tax-free.
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