New Delhi - Facing strong opposition from different quarters over the proposal to tax 60 percent of withdrawals from provident fund, the government issued detailed clarification on the matter on Tuesday evening. At the same time, it has also hinted at a partial rollback of the proposal.
Speaking at an event ‘Budget Verdict’ jointly organised by CNBC-TV18 and Mint, Revenue Secretary Hasmukh Adhia said that "FM has the liberty to review EPF tax". He, however, added that he would not like to speculate on the rollback of the proposal. He also asked for encouraging “people to buy annuity products after retirement."
Following the budget announcement of taxing 60 percent of the corpus of the provident fund at the time of withdrawal, on prospective basis there have been major opposition from the salaried class.
Clearing the air, Adhia said there is no change in the status of public provident fund (PPF) and that EEE (tax exempt at the time of contribution, tax exempt on returns and tax exempt on withdrawals) scheme will continue for PPF.
Also, the government on Tuesday said PPF withdrawals will continue to be fully exempt from tax and only interest accruing after April 1 on 60 percent of the contributions made to employee provident fund will be taxed.
Revenue secretary made it clear that out of the 3.7 crore active contributors in EPF, about 70 lakh corporate sector employees with high salary would be impacted by the proposed taxation of EPF interest on withdrawal.
Through a detailed press release the government tried to further clarify the issue. “There seems to be some amount of lack of understanding about the changes made in the General Budget 2016-17 in the tax treatment for recognised Provident Fund & NPS” stated the press release and clarifications are given on following matters:
(i) 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.
(ii) Towards this objective, the Government has announced that Forty Percent(40%) of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS.
(iii) It is expected that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% 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.
(iv) The Government in this Budget has also made another change which says 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.
(v) The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement.
(vi) The main category of people for whom EPF scheme was created are the members of EPFO who are within the statutory wage limit of Rs.15,000 per month. Out of around 3.7 crores contributing members of EPFO as on today, around 3 crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation.
(vii) 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. What we are saying is that such employee can withdraw without tax liability provided he contributes 60% in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in Annuity product the tax would not be charged on 40%.
(viii) There is no change in the existing tax treatment of Public Provident Fund (PPF).
(ix) Currently there is no monetary ceilings on the employer contribution under EPF with only ceiling being that it would be 12% of the salary of the employee member. Similarly, there is no monetary ceiling on the employer contribution under NPS, except that it would be 10% of salary.
(x) Now the Finance Bill 2016 provides that there would be monetary ceiling of Rs1.5 lakh (Annul) on employer contribution considered with the ceiling of the 12% rate of employer contribution, whichever is less.
(xi) We have received representations today from various sections suggesting that if the amount of 60% 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.
Commenting upon the proposal Nirupama Nirupama Soundararajan, Senior Fellow, Pahle India Foundation “On the change in taxation of EPF and PPF, contrary to public outrage I believe this is an excellent idea. The budget states that our citizens must move towards a society that adopts pensions. Today, most of middleclass tends to withdraw the corpus when possible instead of using it to obtain a monthly income of retirement. While it will still be possible to withdraw the entire corpus a tax component on 60 percent may well be a healthy deterrent."