PPF AND EPF - EXEMPTED INTEREST MUST HAVE RESTRICTIONS TO IMPOSE TAX ON HNI’s.

[CA DEV KUMAR KOTHARI]

Public Provident Fund PPF and Employees Provident Fund (EPF):

PPF and EPF are meant for small savings of general public. Besides EPF organization, many employers maintain their employees PF after obtaining recognition of concerned authorities. These are to provide for compulsory savings in case of salaried persons and for others also some incentive is provided by offering better rate of interest with tax exemption. Such facilities should be monitored and allowed to be used to achieve the purposes of such schemes.

High Net-worth Individuals  (HNI) and PPF and EPF:

Many HNI maintain PPF and EPF accounts and go on accumulating funds in these accounts with benefit of various tax exemptions. Exemption up to certain limit may be justified, however, in case of large amounts invested by HNI such exemption is not justifiable.

Interest income of  (Public Provident Fund) PPF:

Interest income on money invested in PPF is totally exempt. It is not even taxed in indirect manner by lowering of rate of interest as is case in case of tax free bonds vis a vis taxable bonds. The rate of interest is 8.7% pa. Though there are some restrictions on amount to be deposited annually, however over a period of time many high net-worth individuals (HNI) have made sizable amount of deposit in PPF.

Interest income of Employees Provident Fund (EPF):

Interest income of money invested in EPF is also generally totally exempt. Many HNI makes substantial voluntary contribution in EPF and have accumulated large amount in such accounts. The rate of interest ranges about 8- 9 % pa.   

An analysis is required:

An analysis of top depositors in PPF and EPF is required for ascertaining the effectiveness of restrictions on exempted amount. It is expected that many HNI’s are earning substantial amount of tax free income on PPF and EPF.

Some restrictions are desirable:

HNI can bear tax burden as they have a strong capital base. The interest earned on PPF and EPF is principally in nature of un-earned income for such people. As they have better capital base, they can bear higher tax on income. In case of HNI feature will be that there is no withdrawal or there are few and small withdrawals. Whereas a middle class individual takes loans, make partial withdrawal, and even close accounts to meet various needs.

One of purposes of taxation is to collect higher tax from persons who can bear higher tax.HNI are such people. The tax so collected is used interalia for welfare of poor public. Higher tax on HNI is also one small step and way to  distribute some capital in poor public to reduce disparity amongst people.

Therefore, it is desirable that restrictions on exempted amount on income should be imposed. The restrictions can be imposed on the following lines:

Interest on PPF and EPF  taken together will be exempt only up to Rs. one lakh per year in case of nay individual/ HUF.  Such interest shall also be liable for tax deduction at source.

or

Interest on PPF and EPF, taken together will be taxable and tax deductible at source, if the amount of deposits exceeds Rs. fifteen lakh in case of any individual/ HUF.