Allow PFs to invest in equities: Dave panel

Dave committee has also proposed setting up a National Senior Citizen8217;s Fund for getting better returns on the savings of elderly persons. In order to encourage maximisation of returns on investments, phase-I of project quot;Oasisquot; old age social and income security has favoured abolition of present system of taxation whereby earnings over 12 per cent are taxed.

8220;Present concept of limited, assured returns should be abolished. Instead returns should be determined, year to year depending upon annual earnings to eliminate any potential government subsidy,8221; the committee appointed by Ministry of Social Justice and Empowerment said.

The20-page report has also suggested renaming Provident Fund Account to Employee Retirement Account to clarify its true objective and Public Provident Fund PPF to individual retirement account to focus on its objective.

Dave committee also suggested that provident funds should be allowed to invest upto 20 per cent of their funds in investment grade corporate debt and upto 10 per cent in domestic equity. It also said these funds could be used for trade in securities in secondary market. However, the committee cautioned on equity investment and said initially investment should be permitted only through index funds either on NSE-50 or BSE national indices.

The report says that premature withdrawals before the age of 60 should attract a flat 10 per cent withdrawal tax in order to encourage individuals to consider alternative fund sources for their needs. Premature withdrawals should only be permitted in the event of permanent disability, death or for specific purposes relevant for old age income security, itsaid. The report further suggests that provident fund withdrawals after retirement with initial exemption of Rs one lakh should also be taxed at 10 per cent.

However the portion of accumulations at maturity that are used for purchasing annuity or for other investments, under Section 54-E of Income Tax Act, should be exempted from 10 per cent withdrawal tax.

For better coverage of provident funds, the report says that existing restrictions on 177 industries/classes should be abolished to ensure coverage of all establishments. The minimum number of employees in an establishment for coverage under pension system should also be lowered from 20 to 10 and eventually to five, it said adding that wage ceiling of Rs 5,000 be abolished making all employees eligible for provident fund.

quot;These steps will increase the number of establishments covered by provident funds by 0.26 million and thereby benefit an additional 6.25 million individualsquot; the report added. For Public Provident Fund PPF, it said the limit oftax free annual contribution should be raised to Rs 1.2 lakh. quot;This would make the PPF equitable with provident fund and would remove discrimination in tax-treatment of self-employed and employed personsquot;.

On the proposed National Senior Citizen8217;s Fund, it said present contribution of 1.16 per cent by the government to the employees pension scheme be channelled into this fund as initial corpus till this contribution is gradually withdrawn. Part of the withdrawal tax on provident funds may also be transferred to this fund annually, the report added.