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Proposal to tax EPF blow to workers

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  3 March 2016 12:00 AM GMT

The Fince Minister’s budget proposal to tax retirement savings in the Employees’ Provident Fund (EPF) has stirred a hornet’s nest. As the proposal stands, 40 per cent of the total corpus withdrawn at the time of retirement will be exempt from tax. But the remaining 60 per cent of contributions made after April 1, 2016 along with the returns earned on it, would be taxed if withdrawn at one go. This has triggered an outcry with employees’ unions shooting off strongly-worded pleas to the Fince ministry; social media is abuzz with online campaigns against the government now trying to ‘gw at the nest egg the already highly-taxed salaried middle-class puts into the EPF’. There is also much confusion about the Fince Minister’s proposal — whether only the interest accrued on 60 percent of the contributions to the EPF will be taxed with the principal amount remaining tax-exempt, or the whole corpus consisting of the principal as well as the accrued interest will be taxed. The Fince ministry did try to clarify matters on Tuesday — that there will be no tax on EPF savings if these are invested in annuities, that heirs of contributors withdrawing the annuity sum will also not be taxed, and that there will be no tax on Public Provident Fund (PPF). It also assured that the Fince Minister will go into the question whether the proposed tax ‘would be limited to returns on the corpus’ and take a decision in due course.

Throughout their years of service, salaried employees along with their employers contribute equally to the EPF, which is essentially their retirement corpus in a country with no social security system. The contributions to EPF have been exempt from tax; withdrawals were not taxed either. It has presently grown into a corpus of Rs 6.5 lakh crore with 3.7 crore contributing members, providing interest at the rate of 8.8 percent. A section of economists has long been criticizing this ‘high’ interest rate to be unsustaible, ostensibly imposed by parties and unions with Leftist leanings. They have been calling for an end to the EPF’s totally tax-free status. Fince Minister Arun Jaitley has justified his budget proposal on two grounds — firstly, that it will ensure people invest in annuities which are not taxed, and thereby have old age insurance and security; and secondly, that it will bring the tiol Pension System (NPS) on par with the EPF. This refers to the NPS being under the ‘Exempt-Exempt-Tax’ (EET) principle, in which contributions are not taxed, but the corpus accumulated till retirement is taxable at the time of withdrawal. However, other competing social security or pension products EPF and PPF come under the ‘Exempt-Exempt-Exempt’ (EEE) principle, in which contributions, interest income and withdrawals are all exempt from tax. It is for this reason that NPS has remained uttractive for investors, despite an earlier budget incentive of tax benefit on NPS investments. Seeking a level playing field, the Pension Fund and Regulatory Development Authority (PFRDA) had to request the Fince ministry to bring about parity between the NPS and the EPF, as far as taxation was concerned.

This is what moved Jaitley to say in this year’s budget speech that ‘tax treatment should be uniform for defined benefit and defined contribution pension plans’. In case of the NPS, he also proposed to make withdrawal up to 40 per cent of the corpus at the time of retirement tax exempt. So instead of making the NPS an EEE option, the Fince Minister is seeking to bring other products like the EPF on par with it as an EET option. This means that at the time of retirement, the there will be two choices — either re-invest in annuities, or else pay heavy taxes. With little incentives thrown his way during service years and mostly left to fend on his own after retirement, the worker now has to contemplate one-fourth or one-third of his savings going to government coffers. Is it any wonder that employees’ unions are up in arms over the Fince Minister’s proposal? After all, many retiring employees withdraw EPF money in bulk to buy or build homes, or pay for their children’s higher education or marriage. The question being asked is — does the government get to decide what a worker should do with his retirement funds? It is also being pointed out that there are not many annuity schemes giving good returns to investors. Some economists are wondering whether Jaitley’s proposal will force employees to turn away from the EPF after making the statutory minimum contribution, and park the rest of their savings in real estate or gold, which in turn will hurt domestic capital formation. The Fince Minister has now said he will give the government’s fil response during the budget debate. Unless he is seen standing up for the over-burdened, salaried taxpayer even as he holds out carrots for tax defaulters, Jaitley risks saddling his government with a bad political dividend on his proposal to tax EPF contributions.

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