Issue of Provident Fund

• Finance Minister has proposed to tax 60 per cent of the corpus of the provident fund at the time of withdrawal, on prospective basis. This has evoked strong opposition from employees’ representatives on the Board of the Employees’ Provident Fund Organisation (EPFO).
• As part of its Budget 2016-17 announcements, the government has proposed to impose a tax on 60% of the corpus at the time of withdrawal.
• The Government has announced that Forty Percent (40%) of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS.
• It is expected that the employees of private companies will place the remaining 60 per cent of the Corpus in Annuity, out of which they can get regular pension. When this 60 per cent 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.

Employees’ Provident Fund (EPF)

• The Employees’ Provident Fund is a retirement benefit scheme that was structured to provide financial security to employees of factories and other establishments post-retirement.
• It is administered by the Employees’ Provident Fund Organisation (EPFO) whose highest body is the Central Board of Trustees, with representation from the government, employers and employees.
• While 12% of the basic salary and dearness allowance has to be contributed by all employees earning up to Rs 15,000 per month (not mandatory for others), the employer component (12%) has to be contributed mandatorily in case of all employees. The employer’s component is split into EPF (3.67%) and the Employees’ Pension Scheme (8.33%).
• The return on EPF is decided by the government every year. For 2015-16, the government has announced a small increase to 8.8% from 8.75% for 2014-15.

Why Government do this:

• This was being done by government to bring greater parity in the tax treatment of different types of pension plans.
• 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.

Analysis:

• The government says it will bring parity among provident fund, pension funds and the National Pension System (NPS). Experts say that this will allow investors to choose a product based on the returns they generate and the risk exposure they carry, and not on the basis of the tax benefit they offer.
• Some experts say that the government’s move will make the NPS more popular among investors, as it allows investments to be routed to equity markets that have the potential to generate higher returns. Since the money can be routed to equity markets, it will free up the capital, and can be used in the growth of the economy.
• Another argument put forward by the government is that the move will force employees to place the 60 per cent of the corpus in annuity for getting a regular pension. In case the employee puts 60 per cent of the corpus in annuity, the entire corpus becomes tax free.
• But on the oppositie side, The first argument is that while the government is continuing with the EEE tax benefit for equity linked savings schemes by mutual funds and unit linked insurance plans where middle and large income investors invest, it is proposing to remove EEE benefit from EPF, where the majority of contributors are assumed to be in the low income bracket.
• EPFO is the only retirement saving for workers in the low income group, and an imposition of tax at the time of withdrawal will rob them of a sizeable portion of their long-term savings.
• Some argue that since the contribution to EPF goes from tax-paid income, if the government imposes tax at the time of withdrawal, it will be like taxing them twice on the same income.
• A majority of low income workers withdraw their EPF money in full at the time of retirement to buy a house or for other important purposes — and restricting them by imposing tax on 60 per cent of the corpus will erect hurdles in their achieving their goal.
   

By: Vishal