Final call on taxing EPF savings during Budget debate: Arun Jaitley

Finance Minister Arun Jaitley on Wednesday bought himself some time on the Budget proposal to tax withdrawal of employee provident fund (EPF), when he said a final decision would be announced during the debate on the Budget in the Parliament.

"There has been some reactions. When the debate comes up in Parliament, I will give the government's response as to what decision we finally take in this matter," he said at his post-Budget interaction with the trade chambers on Wednesday.

Jaitley defended the proposed EPF rules saying it was aimed at creating an insured and pensioned society. "The intention is not revenue raising," he said.

Interestingly, the ministry has kept the NPS and EPFO members with income below Rs15,000 out of the ambit of the new norm. Even the government employee provident fund is not part of it.

In a 11-point clarification issued on Tuesday, the ministry said: "In EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly-paid employees of private sector companies."

Pointing out that presently, this category can withdraw amount without any tax liability, it said the government wants to bring in the clause that "provided he/she contributes 60% in annuity product so that pension security can be created for him according to his earning level. However, if he/she chooses not to put any amount in annuity product, tax would not be charged on 40%".

Sonu Iyer, tax partner, EY India, said government employee provident fund continues to be outside the net of the proposed amendment in the EPF.

"Because the government employees are covered under the statutory provident fund scheme under the Section 10-11 of the Income Tax (I-T) Act, for which no change is proposed, they are outside the ambit of this," she said.
According to Iyer, Section 10-11 of the I-T Act says withdrawal from the statutory fund and any other notified provident fund by the central government was outside the ambit of this change.

Government employees have a provident fund scheme similar to the EPF that comes under the Provident Fund Act, 1925.

The government introduced the new pension scheme (NPS) from January 1, 2004. The circular of the NPS scheme says: "The new pension scheme works on defined contribution basis and will have two tier – tier 1 and tier 2 – contribution to tier 1 is mandatory for all government servants joining government service on or after January 1, 2004, except the armed phase in the first stage. Those who are in government service before that come under Provident Fund Act, 1925".

Iyer said the proposed EPF rules were more attractive to an employee compared with NPS because at least he would be allowed to withdraw employee share and interest thereon. In case of NPS, an employee cannot touch the corpus before the age of 60.

Even at the retirement age, the employee can pull out only 20% as lump-sum while the remaining 80% has to go into an annuity scheme.

The EY tax expert questioned the government's logic to offer tax break only if the 60% EPF was put in to an annuity plan.

"Why would anyone do that? They would rather say let me put it in some tax-free or non-tax avenue rather than putting it in an annuity schemes where every month I'll have to pay tax on it," said Iyer.

According to her there was also an element of double taxation because the EPF corpus is build up from money on which tax is already paid by the employee.