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

Prime Minister Narendra Modi is seized of matter; decision soon, say officials.

March 05, 2016 11:44 pm | Updated December 04, 2021 11:03 pm IST - NEW DELHI

All options on the controversial budget >proposal to tax EPF savings , including a complete rollback, are on Prime Minister Narendra Modi’s table and a decision is expected at the highest level in the government soon, senior officials told The Hindu on Saturday.

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

“We were trying to bring some parity in [the tax treatment] of different pension funds and provident fund instruments… But the entire thing is open right now…,” V. Anandarajan, Joint Secretary in the Finance Ministry dealing with direct taxes, said on Saturday.

His comments are significant as they leave out the new narratives that the Finance Ministry has introduced into the debate over the past week: only 60 per cent of the interest income from EPF savings would be taxed or 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.

“I don’t want to comment much and muddy the waters further. Apart from parity, there was a concern that the NPS was not taking off because it was being taxed at the stage of withdrawal. Those were the concerns because of which (the tax was proposed),” he said, addressing members of the Confederation of Indian Industry at a post-budget interaction here.

‘It amounts to double taxation’

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

At an inter-ministerial meeting he chaired on Thursday, the Labour Ministry is learnt to have 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, another senior official said.

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 official said the government was considering a full rollback of the EPF tax proposals, as demanded by Labour Minister Bandaru Dattatreya and allies of the ruling NDA, especially since the political price of sticking to them could be too high ahead of the Assembly elections, including in West Bengal and Kerala. “Trying to save face with a dilution [of the plan] or a partial rollback would also be risky, especially since the alternative proposals from the Finance Ministry are not optimal from a taxation or implementation point of view,” this official said.

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 mooted 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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