EPF tax proposal likely to be axed as Centre has a rethink

One of the senior officials said that every alternatives in the contentious budget proposal to EPF tax savings including a complete rollback is placed on Prime Minister Narendra Modi’s table and decision and a decision of the highest level in the government is expected soon.

A senior official of the Finance Ministry approved that the entire proposal was under review and the Ministry’s unusual aim was to promote the New Pension Scheme (NPS) that had failed to take off over 10 years after it was launched as the EPF offered better tax benefits.

The Joint Secretary in the Finance Ministry dealing with the direct taxes said that we are trying to bring some equality in the tax treatment of different pension funds and provident fund instruments.

The Finance Ministry has introduced into the debate over the past week that said, addressing members of the Confederation of Indian Industry at a post-budget interaction:

  • Only 60 per cent of the interest income from EPF savings would be taxed
  • If the entire EPF corpus at retirement would be tax-free if an employee buys an annuity with 60 per cent of his EPF account balance.
  • Apart from equality, there was a concern that the NPS was not taking off as it was taxed at the time of withdrawal.

 ‘It amounts to double taxation’

The Principal Secretary in the Prime Minister’s Office has already reviewed the EPF tax plan twice this week, starting from the day after the Union Budget was presented, when its impact on the working class became apparent.

At an inter-ministerial meeting, the Labour Ministry pointed out that the tax would yield little more than Rs. 200 crore a year from employees earning over Rs. 15,000 a month under the EPF scheme.

The Labour Ministry also pointed out that since high-income employees, who invested voluntarily in the EPF beyond the Rs. 1.5 lakh tax deductions offered under Section 80 C of the Income Tax Act, were anyway taxed on their contributions.

So taxing their returns or accumulated corpus, at retirement, would amount to double taxation.

The Labour Ministry has told the PMO that EPF members already get a pension under the employees’ pension scheme, so instead of forcing them to buy another pension plan through an annuity product with 60 per cent of their EPF account balance at retirement, it would be better to revamp the existing scheme.

The other proposal, floated by the Finance Ministry after the budget, is that the tax would only be levied on the 60 per cent of interest income on EPF contributions made after April 1, 2016.

The Labour Ministry has argued that taxing EPF returns announced annually would lead to accounting problems and deprive members of the compounding effect of long-term savings.

While it may be possible to maintain multiple sets of accounts for each member to distinguish the interest income from the principal, the idea runs counter to Chief Economic Adviser Arvind Subramanian’s recommendations in the Economic Survey for 2015-16.

The Survey has unlikely a “phased move” to an EET method of taxation of savings, wherein contributions and income from them are exempt from tax, but accumulated savings are taxed at retirement. Taxing interest income would mean subjecting EPF to an ETE (exempt, taxed, exempt) treatment, a system not used anywhere in the world for such funds.

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