Capping of Provident Fund Subscription for the armed forces needs a relook | The Financial Express

Capping of Provident Fund Subscription for the armed forces needs a relook

There has also been marked progress in increasing the ambit of these schemes to cover an increasing number of beneficiaries as well as the quantum of assistance.

Capping of Provident Fund Subscription for the armed forces needs a relook

By Maj Gen Ashok Kumar, VSM (Retd) 

Every December 7, the Armed Forces Flag Day (AFFD) is celebrated as a mark of tribute to India’s defence personnel, irrespective of their serving status. AFFD not only remembers those who made the ultimate sacrifice for the nation but also the living veterans and the serving personnel. Starting on December 7 1949 – also the year when the Indian forces reclaimed the majority of the territory in J&K – the significance of the event has increased exponentially and we have come a long way traversing through multiple governments – of various ideologies – at the state and Central level. There have been regular efforts over the last 73 years focusing on providing financial assistance to the neediest. There has also been marked progress in increasing the ambit of these schemes to cover an increasing number of beneficiaries as well as the quantum of assistance.

The issue that remains to be debated is whether the current approach to financial assistance is a good model or if something more is required. Though the government has taken several positive policy decisions for the Armed Forces community, a negative clause inserted in the previous Budget threatens to negate to a large extent the accumulated goodwill. This issue – that of an upper limit of Rs 5 lakhs as tax-free interest accrual for the Defence Services Officers Provident Fund (DSOP) as well as the General Provident Fund (GPF) – affects not only the entire Armed Forces community but government employees as well. This issue is being raised now since the new budget announcement is due on February 1 2023 and a course correction, if done now by the government, will lead to the alleviation of several financial issues for the backbone of the country.

The main matter relates to the subscription to GPF where the interest accrued was tax-free but limited to a minimum of six percent and a maximum of 100% of an employee’s emoluments. This arrangement of keeping the minimum and the maximum limit was a good enough practice of bracketing the contributions in the provident fund but a new cap of Rs 5 lakhs was also prescribed for the yearly contributions, a measure which was not at all needed, at least for the government employees in general and the Armed Forces personnel in particular.  When this provision was first announced in February 2022, the reason given was that some subscribers were depositing a huge sum of money in their provident fund accounts and thereby benefiting from the tax-free returns. To address this perceived anomaly, the Government introduced this limiting provision of Rs 5 lakh applicable to all government employees including even the defence personnel without going into the service-related conditions, constraints and challenges posed to the personnel.

The Government has been highlighting the simplification of rules and regulations but on the other hand, they have made certain simple rules extremely complex as this instant example demonstrates. Even if the Government wanted to mandate a restrictive contributory figure, it could have exempted the government employees, since the minimum and maximum limits have already been laid down. Being paid by the Government, the employees cannot hide any details of their salary and therefore there could have been a simpler process of investing their savings and building up some capacities for their future especially when the social security structure for the masses is still in infancy. The provident fund so accrued can be utilised by the concerned governments for infrastructure and related growth of the nation. There are several infrastructure development agencies which borrow funds from the market at a much higher cost than the Government pays to the EPF subscribers. Through this, we are also reducing the cost of capital giving impetus to the entrepreneurial spirit of the country. It is therefore a win-win model if all Government employees are exempted from this monetary ceiling of Rs 5 lakh per annum and be permitted to continue contributing as per the pre-2022 regime. This itself brackets the contribution at the lower and upper ends. The pre-2022 regime is effectively enforceable for all Government employees including the Armed Forces.

In addition to the difficulties and challenges of other Government employees, the same becomes more acute for members of the Indian Armed Forces, the majority of whom are serving in difficult, remote and generally inaccessible areas. The deployment on the Line of Control (LC) with Pakistan has increased post-Operation Vijay in 1999 and the same is bound to increase substantially along the Line of Actual Control (LAC) with China. It is therefore very critical that the members of the Armed Forces are freed from the mental agony of looking after their finances for optimum benefits. The nation will do well if it can free its soldiers from all psychological and emotional challenges so that they remain focused only on the nation’s adversaries.

The Armed Forces have an efficient mechanism where the provident fund contribution is deducted by the paying authorities as per instructions of the defence personnel. This simplicity allows the service member a convenient tool to cater to his/her secure financial future. By removing this cap for the defence personnel, the Government can pay real tribute to the members of the Armed Forces and that too, without spending a penny from their pocket as the amount accrued can be utilised by the Government as per norms enshrined for the purpose. If the Government takes these steps in the coming budget, it will concretise the real meaning and purpose of the Armed Forces Flag Day by relieving the hundreds of thousands of personnel whose sole purpose is preserving the sovereignty and territorial integrity of the country. However, if this mitigating step is not taken then AFFD remains a token – a hollow ritual of pinning flags on lapels, seeking donations and providing some financial assistance to deprived beneficiaries. As against this, abolishing the yearly limit from the provident fund contributions for the Armed Forces personnel will address their real financial concerns and free them to focus on the collusive machinations of both China and Pakistan. The best part is, the Government can reinstate this enabling provision without spending a penny, in the proverbial sense. Assumed loss of income tax can be well compensated by better fiscal management of deposits.

Author is a Kargil war veteran and defence analyst. He is a visiting fellow of CLAWS and specialises in neighbouring countries with special focus on China. 

Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.

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First published on: 28-12-2022 at 14:01 IST