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Facing flak, govt says will consider rollback of tax on EPF withdrawals

New Delhi: Under all-round attack following its Budget proposal to tax 60 per cent of withdrawals from provident fund and a ceiling on employers contribution, the government today promised to consider demands for a rollback of

India TV Business Desk [ Updated: March 02, 2016 8:04 IST ]
facing flak government says will reconsider tax on epf
facing flak government says will reconsider tax on epf withdrawals

New Delhi: Under all-round attack following its Budget proposal to tax 60 per cent of withdrawals from provident fund and a ceiling on employers contribution, the government today promised to consider demands for a rollback of the proposal to tax but made it clear that PPF will continue to be exempt from tax.

While Revenue Secretary Hashmukh Adhia went maintained that only 60 per cent of interest on contributions made after April 1 will be taxed and that the principal amount of contribution will remain untouched at the time of withdrawal, a government press note issued today made no mention about taxing only the interest.

It claimed that the new tax proposal was aimed at taxing only the high salaried individuals totalling about 70 lakh people out of the 3.7 crore Employee Provident Fund (EPF) members. About 3 crore individuals come under the statutory wage limit of Rs 15,000 per month so will not be affected by the proposed changes, it said.

Also read - PPF withdrawal out of tax ambit ; only interest to be taxed in EPF: Govt

Finance minister Arun Jaitley in his Budget speech for 2016-17 on Monday had proposed that 60 per cent of the withdrawal on contribution to employee PF made after April 1 this year will be subject to tax. This would apply to superannuation funds and recognised provident funds including EPF.

He also proposed a monetary limit for contribution of employer in recognized PF and superannuation fund at Rs 1.5 lakh per annum for taking tax benefit.

The proposal came under immediate attack from various employee unions including the RSS-backed BMS, and political parties who termed it as "an attack on the working class and a clear case of double taxation."

The Finance ministry issued a press note containing a clarification about the proposed changes in the tax treatment of recognized PFs and recognized pension schemes noting that there seems to be some amount of lack of understanding about the changes made in the Budget on the issue.

"We have received representations today from various sections suggesting that if the amount of 60 per cent of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount.

"We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance minister would be considering all these suggestions and taking a view on it in due course," the press note said.

Also read - EPF row: Opposition slams proposal to tax Provident fund, unions warn stir

All contributions and interest accrued to EPF before April 1, 2016, will not attract any tax on withdrawal.

The press note 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.

Towards this objective, the government announced that 40 per cent of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS.

"It is expected that the employees of private companies will place the remaining 60 per cent of the corpus in annuity, out of which they can get regular pension. When this 60 per cent of the remaining corpus is invested in annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity," it said.

The government in the Budget also made another change to say that when the person investing in annuity dies and when the original corpus goes in the hands of his heirs, then again there will be no tax.

The idea behind this mechanism, it said, was to encourage people to invest in pension products rather than withdraw and use the entire corpus after retirement.

"However, in EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly-paid employees of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this," the press note said.

Such employee can withdraw without tax liability provided they contribute 60 per cent in annuity product so that pension security can be created for them according to his earning level. However, if the employee chooses not to put any amount in annuity product the tax would not be charged on 40 per cent only.

"There is no change in the existing tax treatment of Public Provident Fund (PPF)," it said.

(With PTI inputs)

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