Stung by a backlash from trade unions and the salaried class against the Budget proposal for taxation of employee provident fund withdrawals, the government on Tuesday indicated that the new tax could be tweaked to apply only on the accumulated returns on the PF corpus, instead of on the corpus as stated by finance minister Arun Jaitley in his Budget speech. It added that the Finance Bill provision for capping the employer’s contribution to the employee’s provident fund at Rs 1.5 lakh a year could also be reconsidered.
In the Budget unveiled by Jaitley on Monday, he proposed to align the tax treatments of EPF and National Pension System (NPS) to give a fillip to the latter and encourage people to opt for regular pension income. He proposed to make 60% of EPF/NPS corpus taxable on withdrawal. While EPF is currently exempt from taxation at the three stages of contribution, accumulation and withdrawal, NPS withdrawals are taxable. This is seen as one reason NPS hasn’t shown the growth expected by its proponents — around 1.15 crore people have subscribed to NPS so far and asset under management is still around R1 lakh crore, while the EPF subscriber base is 3.7 crore and the corpus is Rs 6.2 lakh crore.
At variance with the Budget speech, the Finance Bill, however, says withdrawal from EPF up to 40% of the accumulated balance attributable to contributions made by an employee will be tax-free, meaning the balance 60% of only the employee’s contribution will be taxable and that the employer’s contribution would continue to be exempt. (Of course, the current exempt-exempt-exempt regime will continue in the case of over 3 crore EPF subscribers below the statutory wage limit of R15,000 a month).
While senior ministry officials had flip-flopped on the issue since Monday, the ministry issued a clarification later that since the purpose of the reform was to encourage more private sector employees to go for pension security after retirement instead of withdrawing the entire money from the provident fund account, the entire corpus would be tax-free if invested in annuity.
The government’s rationale for making EPF taxable is also that while the scheme was created for people within the statutory wage limit of Rs 15,000 per month, some 60 lakh others with relatively higher incomes who have joined the scheme voluntarily can’t be continued to be allowed to withdraw sums without any tax liability.
“We have received representations today from various sections suggesting that if the amount of 60% of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The finance minister would be considering all these suggestions and taking a view on it in due course,” the ministry said.
The EPF has a small Employees Pension Scheme (EPS) component, which came into effect in 1995. EPS is a mix of defined contribution and defined benefit schemes and employees don’t have to contribute to it. All members get a minimum monthly pension of Rs 1,000 every month after retirement, and even monthly pension for the widow, where the minimum amount is Rs 750 a month and minimum of Rs 250 per month for dependent children.
Sources from the labour ministry told FE that they had no knowledge of the finance ministry move to change the tax treatment of EPF.