EPF tax withdrawn: How the controversy rendered NPS more attractive
Finance minister Arun Jaitley on Tuesday withdrew the controversial tax on employees provident fund after the middle class outrage threatened to synge the government badly. However, the positive outcome of the whole controversy is that the National Pension Scheme has become more attractive for investment.
The proposal that was announced in the Budget 2016 was to tax 60 percent of corpus of a private sector employee's EPF corpus, if he or she does not invest the amount in annuity schemes. If 60 percent is invested in annuity, the entire EPF corpus will become tax-free. The move was aimed at forcing private sector employees to invest in retirement schemes.
Whatever the government's intention was, the move rubbed the salaried class - the Narendra Modi government's hard core constituency - the wrong way. As the outrage heightened, trade unions, including the RSS-affiliated Bharatiya Mazdoor Sangh, called for a nationwide strike on 10 March.
It is in response to this Jaitley made the announcement to withdraw the tax proposal on Tuesday.
"In view of representations received, the government would like to do a comprehensive review of this proposal and therefore I withdraw the proposal," Jaitley said in a suo motu statement in Lok Sabha.
"Employees should have the choice of where to invest. Theoretically such freedom is desirable, but it is important the government to achieve policy objective by instrumentality of taxation. In the present form, the policy objective is not to get more revenue but to encourage people to join the
pension scheme," Jaitley said explaining the rationale for the taxation proposal.
While the middle class protested saying it is unfair to tax one's retirement funds, there were also views that the proposal may not be all that bad since the intention was for the tax-payer's good.
However, as said earlier the whole controversy has made the NPS has become a little more attractive for the common man. This is because Jaitley also announced on Tuesday that 40 percent exemption given to the NPS subscriber at the time of withdrawal has not been withdrawn. The proposal to make 40 percent of withdrawal from the NPS at the maturity to be made tax-free.
"EPF will hence continue to be an attractive investment option with an EEE scheme. The icing on the cake is that the exemption provided for 40% withdrawal from the NPS corpus still remains. The NPS scheme would hence now move from a EET scheme to a partially exempt scheme at the time of withdrawal making this more attractive,” said Tapati Ghose, partner, Deloitte Haskins & Sells LLP.
Decoding the latest announcement Alok Agrawal, senior director, Deloitte Haskins & Sells, said that the employer’s contribution to PF in excess of Rs 150,000 per annum should continue to be non-taxable so long as it is within 12 percent of salary.
Withdrawal from these funds will continue to remain fully tax exempt subject to the existing conditions (e.g. 5 years’ continuous service for PF exemption).
However, he also points out there is a lack of clarity even in the latest announcement. "With this announcement, it is not clear whether the non-taxable limit for employer’s contribution to superannuation funds would be increased from the existing limit of Rs 100,000," he said.
He also concurs with Tapati that NPS will become more attractive.
"The proposed tax exemption up to 40% of amount withdrawn will help in making the scheme more popular," he said.
"The fact that this exemption/ deduction is over and above the EPF tax benefit is particularly relevant to those individuals who may have withdrawn their EPF balance at the time of changing jobs in the past or leaving India for an international assignment. If such individuals are employed in India again, they would certainly consider investing in NPS (in addition to their ongoing EPF) to help them in beefing up their retirement fund," he said.
However, he said a clear picture will emerge only once the finance minister tables the amended Finance Bill before the Parliament.
Arun Jaitley said changes have been made in the NPS in "larger interest of employees".