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Finance minister Arun Jaitley. Photo: PTI
Finance minister Arun Jaitley. Photo: PTI

Govt blinks, rolls back tax on EPF

Govt also withdraws ceiling on employer contribution to provident fund for claiming tax benefits; roll back may dent reformist image

New Delhi: Bowing to pressure from the Indian salaried class, finance minister Arun Jaitley on Tuesday rolled back the budget proposal to tax withdrawals from the Employees’ Provident Fund (EPF).

In addition, the government also decided to withdraw the provision which put a monetary ceiling of 1.5 lakh on employer contribution to provident fund for claiming tax benefits.

While the National Democratic Alliance (NDA) may have pre-empted its political critics, especially the Congress, the rollback may dent its reformist image.

The original proposal triggered a backlash, particularly from the salaried middle class, prompting Prime Minister Narendra Modi to intervene on Saturday—when he signalled that the government would roll back the proposal.

This was formally done on Tuesday, with Jaitley making a suo motu statement in the Lok Sabha.

“In view of the representations received from various quarters, the government would like to do a comprehensive review of this proposal and therefore, I withdraw the proposals made in para 138 and 139 of my budget speech. The proposal of 40% exemption given to NPS (National Pension System) subscribers at the time of withdrawal remains," he said.

These sections dealt with taxation of provident funds and employer contribution.

With the government rolling back the tax, EPFO will revert to an exempt-exempt-exempt taxation structure while NPS corpus will be partially taxed at withdrawal. Consequently, it means that EPF will continue to be more attractive than NPS, one of the disparities the budget was trying to address.

A number of representations were received from various sections of society, including members of Parliament, suggesting the change would force people to invest in annuity products even when they are not willing to do so, Jaitley said.

“The main argument is that employees should have the choice of where to invest. Theoretically, such freedom is desirable. But it is important for the government to achieve policy objective by instrumentality of taxation. In the present reform, the policy objective is not to get more revenue, but to encourage people to join the pension scheme. There are various other suggestions which can also achieve the same policy objective of encouraging people to join the pension scheme," he said.

According to government estimates, of the total 37 million EPF subscribers, this tax would have impacted 4.4 million subscribers who earn more than 15,000 per month.

In the budget on 29 February, the government had announced that 40% of the total corpus withdrawn at the time of retirement would be tax-exempt, both under EPF and NPS. This made the remaining 60% of the EPF’s incremental corpus from fiscal year 2017 taxable unless the amount was invested in an annuity product. At present, withdrawal from EPF is entirely tax-free.

To be sure, the annuity income would have also been taxable in the hands of the investor.

This prompted the salaried classes to oppose the government’s move to tax its retirement savings.

After the backlash, the government initially promised to review the proposal and hinted that it may confine the tax to only the interest component. It reiterated that its intent was not to earn tax revenue but nudge people to invest a part of their corpus into annuities to ensure access to pension in their retirement years.

“EPF will continue to be an attractive investment option with an EEE scheme. The icing on the cake is that the exemption provided for 40% withdrawal from the NPS corpus still remains. The NPS scheme would hence now move from a EET (exempt-exempt-tax) scheme to a partially exempt scheme at the time of withdrawal, making this more attractive," said Tapati Ghose, partner, Deloitte Haskins & Sells Llp.

Political parties were quick to claim credit.

West Bengal chief minister Mamata Banerjee tweeted, “A victory for the common people. Happy that we were the first to raise this issue. Good."

Not to be left behind, Congress vice-president Rahul Gandhi claimed the rethink was because of the pressure his party had mounted.

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