Tax on PF interest: Should you stop investing in VPF? How bank FDs, RBI bonds,
Along with the mandatory contribution of Rs8,500, Aggarwal’s total monthly contribution to the Provident Fund is Rs 53,500, or Rs 6.42 lakh in a year. From April, the interest earned by Rs 3.92 lakh will get taxed, reducing Aggarwal’s returns to 5.85%. Since Rs 2.5 lakh contributed by him will still earn 8.5% tax free returns, his overall return from the Provident Fund will fall to 6.9%. “I am exploring other options that can give me better returns than 5.85%,” he says.
His concern is shared by millions of Provident Fund subscribers. Only a small percentage of EPF subscribers have salaries high enough that their mandatory contribution breaches the annual threshold of Rs 2.5 lakh. But a large number of subscribers put more than the mandatory 12% of basic in this tax-free haven. An online survey conducted by ET Wealth shows that one out of two subscribers use the VPF to invest more than the mandatory amount in the Provident Fund. Also, over 51% of the 3,578 respondents contribute more than Rs 2.5 lakh a year and will, therefore, get impacted by the new tax that is proposed to kick in from April.
The tax will impact middle and high income PF subscribers
One out of two respondents contributes more than the mandatory 12% of basic pay to Provident Fund.
A caveat: online surveys are skewed towards middle and high income groups and leave out a large section of blue-collar workers who form the biggest chunk of subscribers to the Provident Fund. So, our survey represents the opinions of EPF subscribers from the middle and upper income groups.
Many subscribers would reconsider investing in VPF now
The findings support the Finance Ministry assertion that high salaried subscribers are pouring in large amounts into the tax-free haven. The figures are mind boggling. According to one news report, the 20 biggest subscribers have stashed away Rs 825 crore in their Provident Fund accounts. The largest account has more than Rs 100 crore, which means it is earning more than Rs 8.5 crore tax-free interest every year. That’s more than Rs 70 lakh tax-free interest earned every month.
Two other accounts have more than Rs 85 crore each, which earns them over Rs 7.2 crore tax-free interest every year. Assuming these three individuals are in the Rs 5 crore income slab where the effective tax rate is 42.7% after the 37% surcharge, the government loses more than Rs 10 crore in tax on the Provident Fund interest that accrues to them every year.
By putting a Rs 2.5 lakh cap on the contribution that will earn tax-free interest, the Budget has effectively brought down the shutters on this tax-free haven. It is a clever move, because it affects only the creamy layer of the salaried class.
The respondents to our survey are across income levels, with less than 5% earning over Rs 1 crore a year and a little over 12% earning between Rs 50 lakh and Rs 1 crore. Even so, a significant 7% of the respondents put in more than Rs 12 lakh a year in the Provident Fund, with a tiny minority (2.8%) putting in more than Rs 24 lakh.
Game over for VPF?
Like Aggarwal, many contributors to the VPF are now exploring other options that can give them higher returns. Almost 74% of respondents to our survey say they will restrict their Provident Fund contribution to Rs 2.5 lakh a year and invest the remaining in some other investment option. That’s because the interest on the Provident Fund contributions above the threshold will be treated as income and taxed at the…
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