The finance minister stirred the hornets’ nest when he announced taxing 60% of total EPF withdrawal at the time of maturity unless it is used to buy an annuity product from an insurer. This was the government’s attempt to move the working class towards a pensioned society.

As the working class has been used to tax-free withdrawals from EPF, the Budget proposal came as a bolt from the blue for the entire community.

Some looked at it as a blatant attack on their lifelong savings for old age and other social obligations and a few considered it as an intimidation to forcibly deploy their savings in annuity products even if they had other priorities. Post-Budget, some statements were made by the ministers and officials of the finance ministry to clarify the government’s intentions.

The proposal met with widespread criticism and sensing trouble, the Prime Minister is reported to have quickly decided on withdrawing the proposal till the pros and cons were further examined by experts. This gesture was more a politically strategic step than a stepping back on the concept of pensioned society that the government did float to test public opinion.

In view of the fast ageing of the Indian society and almost non-existing social security schemes, any step to encourage subscription to a pension scheme by individuals must be encouraged. By the end of 2019-20, the average longevity in India is expected to be touching 70 years.

This phenomenon may translate into existence of about 30% of population not earning for themselves but consuming goods and services at a rate hardly less than that of the working class. If we consider the imminent scenario of our demography, we will notice a crisis looming large which may cause serious social problems and may even affect desired economic growth.

Provision of pension is therefore a necessity for people belonging to both, organised as well as the unorganised sector, as the only scientific financial provision for maintenance of the ageing population.

The government’s concern is therefore very justified and timely. But what went wrong with the Budget proposal was the decision to force buying of pension by withdrawing tax incentive on EPF which is also meant primarily for financial support in old age. It was a negative approach; hence it generated lots of negative sentiments and almost spontaneous protest within as well as outside parliament.

The finance minister could have provided for incentive to encourage purchase of annuity or enrolment with the National Pension System (NPS). Currently, annuity income is treated at par with salary for the purpose of income tax. This is a major discouragement for senior citizens from purchasing annuity. Moreover, while purchasing annuity one has to pay service tax which increases the cost of the annuity substantially or in other words the annuity amount gets reduced permanently for the rest of the annuitant’s life.

A liberal funding of annuity plans could have been thought of by the planners. Service tax could be dropped and income tax on annuity could be capped at 10% or could be even spared up to annuity income of at least Rs6 lakh per annum.

The government could eye on tax incidence happening on consumption level rather than at the income level. All annuitants are likely to liberally spend their monthly annuity amount being assured of credit to their account every next month by the same amount as long as they live.

On the other hand, the annuity corpus provides huge long-term fund to the banks and the government to finance infrastructure projects. This is a stable fund and the government could use it for long-term investments.

Annuities are provided by insurance companies. Fortunately, India has a very vibrant insurance market and the insurance companies are engaged in encashing the opportunities created by changing demography and the government’s decision to allow FDI up to 49% in the sector. Currently, annuity is sold mostly by the LIC of India though some other companies too offer the product. The regulator should take steps to encourage insurers to introduce more annuity plans with innovative benefits.

Annuities are available with various payment options such as limited payment annuity or annuity for life. Even joint life annuities are also available for couples ensuring regular income for themselves till the survivor lives on. One major feature is annuity with return of purchase price or annuity for life where purchase price is not refunded to legal heirs.

All these variants can be supported through the tool of taxation by ensuring that the ageing annuitant gets a fair deal.

This will not be a favour but the fulfilment of the responsibility of the state towards a much needed social security need of the society.

The Budget proposal, therefore, seems to be hastily drawn and therefore indicating lack of foresight. It is good that the government has decided not to drag the issue by forcing its thinking on the EPF beneficiaries.

The writer is former MD & CEO of Star Union Dai-ichi Life