In the absence of a social security system, the finance ministry has dropped the idea of taxing people?s savings at the time of final withdrawal from instruments like provident funds and pure life insurance products.

Experts said that dropping the move to tax savings at the time of consumption is good for the low income people, but dropping the plan to tax may hamper the government?s ability to lower tax rates and therefore it may not be good for the financially well-off.

The revised Direct Taxes Code has proposed that the contribution, accumulation and withdrawal of savings in products like the government provident fund, public provident fund, recognised provident fund, the new pension system administered by the Pension Fund Regulatory Development Authority, pure life insurance scheme and annuity would be exempted from tax. The earlier draft had proposed taxation at the withdrawal stage. Among the list of products that would get exempt-exempt-exempt (EEE) taxation, the revised draft does not mention superannuation funds, which experts said, could be an oversight.

?The government had proposed to lower the rate of income tax in the earlier draft of the DTC taking into account the additional receipts from an increased tax base. Dropping the idea of taxing at the withdrawal stage could limit the government?s ability to lower tax rates. While the decision protects the low income people, the benefits for the well-off can be figured out only from how the government will finally calibrate the income tax rates,? said Rajesh Srinivasan, Deloitte?s leader for global employer services.

The government?s populist decision marks a departure from its intention to introduce a ?forced discipline? on people to save and moderate consumption with the idea of future financial security. Invest India Micropension Services director Gautam Bhardwaj, who has done pioneering work in making pension available to the poorer sections in the society, says that taxation at the consumption level would make a person think twice before withdrawing a big chunk of his life?s savings for immediate consumption.

Now, withdrawal of savings above Rs 3 lakh is taxed. The government chose to drop the idea of taxation because it got the response that in most countries where consumption of savings is taxed, there are vibrant social security systems, unlike in India.

The revised draft also proposed harmonisation of contribution and withdrawal rules across various products. Some of the norms are now product specific. For example, now the deduction of the saved amount from the taxable income would start after five years of service in the case of a recognised provident fund. Within a recognised provident fund, the employer?s PF contribution is limited at 12%. Together with pension and provident fund, it is limited at 27% . In case of a public provident fund, there is a cap on the deduction at Rs 70,000.