EPF tax benefits may be retained after backlash

NEW DELHI: Facing a strong backlash from salaried employees over the budget proposal to tax withdrawals from retirement funds, the government is likely to retain tax benefits on the Employees’ Provident Fund ( EPF) and other superannuation schemes. There is currently no tax on such withdrawals. In the February 29 budget, the government proposed that withdrawals in excess of 40% of the accumulated corpus would be taxed, a disincentive designed to encourage people to buy annuities for a lifelong income.

Finance minister Arun Jaitley will make a statement in Parliament on the issue that has brought the otherwise well-received budget much criticism. "FM will make a statement on the issue in Parliament to clear the air," said a senior government official. Government ministers have been flooded with appeals on social media to withdraw the proposal and the Prime Minister's Office also seems to be in favour of such a move. A day after the Budget, the government had issued a statement clarifying its intent and the limited impact of the move, but the criticism has not died down, drowning out the other budget proposals.

Most workers will not be covered by the tax as it will apply to those earning over .`15,000 a month. The government estimates only about 70 lakh high earners will be impacted.


Besides, the tax is not retrospective, in keeping with this go- vernment’s philosophy--it will apply to fresh accumulations from FY16.

A number of solutions including softening the blow by raising the limit, limiting tax only to interest from 2016-17 and removing.`1.5 lakh limit on employers’ contributions have been discussed between the finance ministry and the Prime Minister's Office but the view has veered around to scrapping the measure completely. Another senior government official told ET that instead of talking about the good things in the budget, they are having to defend the EPF tax, as it is being called.

The move to levy tax on 60% of withdrawals from recognised provident funds and the National Pension Scheme (NPS) was aimed at creating a pensioned society and was not a revenue measure designed to yield taxes, the government had said.

“The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund account,” the government had clarified. This also made NPS more attractive as withdrawals from it are fully taxed as of now. The budget proposed that 40% of withdrawals from the NPS would be tax free and sought to bring recognised provident funds on par with this. That would make 60% of the EPS corpus subject to tax at withdrawal unless invested in an annuity. The budget also provided for a monetary ceiling of.`1.5 lakh on employers’ contributions.

This proposal may also be rolled back as there is no such limit in the case of NPS.