PM Narendra Modi steps in, tells Arun Jaitley to hold tax on EPF withdrawal

NEW DELHI: The government has decided to defer its plan to levy tax on 60% of employees' provident fund withdrawal, following an intervention by Prime Minister Narendra Modi.

Finance minister Arun Jaitley will announce the decision in Lok Sabha on Tuesday when Parliament reassembles. As reported by TOI on Saturday, the announcement was scheduled to come on Friday but had to be put off since Lok Sabha did not transact business following the death of P A Sangma.

Sources said that the PM requested Jaitley to put the tax proposal on hold, saying the matter needed to be studied in detail in view of protests from the salaried middle class, which felt that such a move would impact their retirement savings and restrict options, with many describing it as a regressive step. "The government is veering around to the view to defer the proposal till a detailed study by a committee. It is among the options being considered," said a source.

The government had justified the move by saying that it was meant to steer private sector employees towards a pensioned retirement by discouraging lump sum withdrawals, especially for, as experience suggests, conspicuous consumption.

However, protests from salaried employees, opposition parties and within BJP as well showed that the rationale has not been appreciated by the employees.

The response seemed to be that who are you to decide how we spend our money or where do we invest it, leading to a rethink and the request from PM to Jaitley to defer the matter until it has been examined in detail and feedback from people evaluated," said a government source.

Sources said capping employers' contribution was also under consideration. In the Budget, the government had proposed to levy tax on employers' contribution of over Rs 1.5 lakh a year, triggering protests which were targeted at the plan to tax 60% of withdrawals from the EPF corpus created from April 2016, unless invested in annuities. The remaining 40% was to remain tax free.

Trade unions, including RSS-backed Bharatiya Mazdoor Sangh, BJP MPs, along with Congress and other opposition parties, joined the protest which saw online petitions and #RollbackEPF emerge as one of the most trending hashtags on Twitter a day after the Budget announcement.

While the government swung into action to control the damage by announcing that it was open to review, it was the PM who was the principal goad for deferment.

Initially, the government had hinted that the review would result in only the interest portion of the corpus created from April 2016 getting taxed at the time of withdrawal, unless it was used to buy annuities. However, Modi felt that the entire proposal should be deferred. It was also felt that the proposal may take away the "feel-good" vibes that the government's third budget has generated.