EPF tax: More twists than a K serial

In this year's Budget announcement, Arun Jaitley's second as the finance minister, he said that the government had decided to impose a tax on 60% of the contributions made to the Employee Provident Fund (EPF) after April 1, 2016, on the withdrawal date post retirement. The other 40% of the corpus would remain untaxed.

As a justification for this, the government said that its aim was to create a pensioned society. The move was also proposed to bring parity between the government's National Pension Scheme -- which hasn't really taken off since it was rolled-out as much the government expected it to -- and the EPF.

Under the existing provisions of section 80CCD, any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme is chargeable to tax. While, currently, the schemes under EPF are tax free, which means that the contributions to the fund, interest earned and withdrawals are all tax-free on maturity.

To bring in some semblance of parity, Jaitley said that the government had decided to propose a tax exemption on withdrawals up to 40% of the corpus of the National Pension Scheme. On the other hand, he announced the 60% of the contributions made to the EPF after April 1, 2016, will be taxable.

Soon after the budget, the proposal was met with much fury, with people taking to various social media platforms to share their anger and discontent. An online petition demanding the government roll back its tax on EPF withdrawals, garnered 3,000 signatures in less than a day. The petition called the move a “draconian act”, saying that it “will be a killer blow to the already tax burdened salaried class which pays 30% income tax and 30% taxes in indirect form – customs, excise, service tax, etc.”

On March 1, Jaitley, in what is being called a partial roll-back of the earlier announcement, said that 60% of the 'interest accrued' on the contributions made to EPF after April 1, will be taxable and not 60% of the corpus as was earlier announced in the budget.

Jaitley also said that this exempts small income earners, i.e. those earning a salary lower than Rs 15,000, thereby safeguarding nearly three crore people who're a part of the EPFO's scheme.

“All contributions and interest accrued to employee provident fund (EPF) before April 1, 2016, will not attract any tax on the withdrawal. Withdrawal of principal amount contributed to EPF after April 1 would also remain exempt from any tax.

It is only the interest on contributions made after April 1, 2016, which will be taxed, Revenue Secretary Hasmukh Adhia said.

While explaining the government's stand, he said, "We are worried about people blowing off the entire 100% amount on retirement and not investing in pension products. Otherwise, the responsibility comes on the government to take care of healthcare," Adhia said.

Later, in another turn of events, and in the view of relentless opposition from the public, trade unions and the opposition, the government said that it will consider all the demands made for a roll-back of the EPF tax.

On Wednesday, two days after the announcement was first made, Jaitley said that the final decision on the matter will only come during the budget debate in the parliament. "The government was seized of concerns over the EPF issue and will address them during the Budget debate.”

"We are in discussion with stakeholders. There are many stakeholders. Now I cannot reveal many things. Our government is considering all options," he said.