Taxation on EPFO
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In the Union Budget FY21, Finance Minister Nirmala Sitharaman had introduced the move to tax interest earned on employee contributions in the EPFO scheme, in excess of Rs 2.5 lakh per annum. Late March 2021, when announcing the amendments to the finance bill, the FM increased this threshold of Rs 2.5 lakh to Rs 5 lakh in cases where no contribution is made by the employer to the fund. The private sector employees would not benefit from this change as the provisions of the Provident Fund Act which apply to the private sector, the employer as well as the employee both contribute to the fund.
Here's why squeezing any more from the taxpayers, especially the higher income bracket won’t augur well and could lose out on potential long-term investments that GoI can lock in. And why continuing with tax breaks for EPFO would work well for longer-term.
EPFO India
EPFO is one of the largest social security organisations globally, in terms of clientele and the volume of financial transactions undertaken. EPF is a mandatory savings scheme covering workers earning more than Rs 15,000 a month in establishments having more than 20 employees. Hence, EPFO enrolment numbers indicate the state of the economy in the formal sector.
Currently, it has over 6.7 crore contributing members. EPFO manages over Rs 16 lakh crores of investment assets. Its corpus has grown at the CAGR of more than 16 percent for 5 years (pre-pandemic).
There has been much criticism that EPFO needs structural reforms, to drastically improve its efficiency in meeting India’s social security objectives. If it were to act as a global pension fund, then it would have to invest across various asset classes like debt, equity, real estate and other assets, across both domestic and global markets.
The current structure of EPFO and its mandate has meant that it is missing out, in realising its full investment returns potential, while its investment risks have also increased without much leeway for shifting investment buckets. The investors would be happier if EPFO improves on its investment and performance disclosures like any other regulated asset management company has on a regular basis.
Indian Infra funding
That India needs long-term funds for its infrastructure development is a given for next many years. Even assuming that the domestic banks, the newly announced development finance institution(s) and other domestic financial institutions will come in with their contributions in financing infra-projects, this won’t bring in large investments with long-term tenor.
For the economic aspiration that our nation has for its infrastructure development, it needs a far higher quantum of funds. It would be useful for India to find long-term monies from diversified investors to derisk investor-pool concentration.
Advantage EPFO:
This pool of retail investors of EPFO has an investment horizon anywhere between 35 years and 1-year tenure (basis their career years ahead of them).
As long as the right tax breaks are offered as incentives, along with attractive savings interest rates, these investors would be happy to lock in their funds for the long term. And a sovereign-guarantee-of-sorts which anyways EPFO has would add to their comfort.
The idea :
GoI uses EPFO with the following proposition:
Consumer Insight:
As EPF provides guaranteed returns at higher rates, many high-income earners used to contribute more than the mandate of their pay to the fund through VPF to earn higher tax-free interest.
If tax exemption on PF contribution is allowed like it was available until the previous financial year (not limited to just Rs 2.5 lakhs per year), it would help mop up larger amounts from retail investors. In today’s uncertain investment return options, PF (& VPF) is an attractive option for individuals. In a sense, it also increases the savings rate of the economy.
The perceived worry in some policy quarters, that HNIs would be misusing such a PF facility to earn higher returns can be offset with the lock-in period! And probably with even a 50-100 bps lesser interest rate for them beyond a certain investment limit.
This idea would be seen by HNIs/UHNIs as attractive and safe like a sovereign infra-bond investment. Let’s use these monies for nation-building!
—Srinath Sridharan is an independent markets commentator, startup mentor and CEO coach. The views expressed are the authors' personal
(Edited by : Ajay Vaishnav)
First Published: Jun 16, 2021 4:44 PM IST
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