NEW DELHI/ CHENNAI: Facing intense heat over its decision to tax 60 per cent of the total corpus withdrawn from the Employees Provident Fund (EPF) after retirement, dubbed as ‘retirement tax’, the Centre has backed down, partially rolling back the proposal.
In a clarification on Tuesday, the Finance Ministry said the proposal will not be applicable to around three crore EPF subscribers within the statutory wage limit of Rs 15,000 per month, but only for the 60 lakh subscribers, who have accepted EPF voluntarily and are highly paid employees in the private sector. The EPF currently has 3.7 crore participants.
Taxation of EPF withdrawals after retirement came as a huge shock to most of the salaried people since it would have subjected a large portion, 60 per cent, to tax. The EPF has so far been an ‘Exempt-Exempt-Exempt’ (E-E-E) scheme, where contribution, interest earned and final withdrawal post-retirement have been tax free.
The Budget converted the tax treatment to the E-E-T (Exempt-Exempt-Taxed) model. While the Budget announcement had made clear that the tax would be applicable only on deposits and interest on deposits made after April 1, 2016, it was still viewed as a big blow.
The uproar over the move, however, has led the government to roll back the proposal, at least partially. “Of around 3.7 crore contributing members of EPFO as on date, around 3 crore subscribers are in this category V (within the statutory wage limit of Rs 15,000 per month). For these people, there is not going to be any change in the new dispensation,” said the Finance Ministry.
“However, in the EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly-paid employees of private sector companies. For these people, the amount at present could be withdrawn without any tax liability. We are changing this. What we are saying is that such employees could withdraw without tax liability, provided one contributes 60 per cent in annuity product so that pension security could be created for him or her according to his/her level of earning. However, if the same person chooses not to put any amount in the annuity product, the tax would not be charged on 40 per cent,” the ministry clarified.
The clarification has not succeeded in pacifying trade unions, who are up in arms about what they call a concerted effort by the government to do away with the E-E-E structure of the EPF. “We will not accept this as a roll back, or even a partial roll back. This is an attempt to wriggle out of a situation of their own making. The problem is the attitude of the government. How does it matter if it is Rs 1,000 that is going to be taxed or Rs 1? It is hard earned money,” said A K Padmanabhan, president of the Centre of Indian Trade Unions (CITU). “We will not be be satisfied until the whole thing is rescinded,” he said.
While the government seems to have partially backed down, the Ministry has said that it will only “consider” representations from various quarters to make only the accumulated returns (interest earned) taxable and not the entirety of the withdrawal amount.
Striking a contrary note to the majority opinion, however, former EPF regional commissioner R Subash said the move was a huge step in the right direction because of the ground realities of post-retirement in India. “I have seen in almost every case that people who retire invariably take out the PF amount post retirement, spend it on their children, either for their weddings or other similar expenses. They are left with nothing. The concept behind the PF is to operate as a social security scheme and not a savings scheme,” he pointed out. “The government’s move towards a more pensioned society should be lauded. Pensions are crucial to senior citizens.”
The statement from the Finance Ministry came in the form of a 11-point clarification, which addressed the government’s motives behind introducing this.
The fine print
Who will not be taxed: Those with salary (basic+DA) of less than Rs 15,000 per month
Who will be taxed: In the govt’s reckoning, if your salary exceeds Rs 15,000 a month, you are in the ‘high earning’ bracket, so your voluntary contribution to EPF will be taxed
How will they be taxed: 60% of total withdrawal (employee contribution + interest earned) to be taxed based on IT slabs