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Tuesday, October 26, 2021

The PF Storm

The government must present a more convincing case for doing away with tax exemption on EPF corpus withdrawals.

By: Express News Service |
Updated: March 2, 2016 7:47:26 pm
epf, ppf, budget 2016, EPF withdrawl, provident fund, epf tax, ppf tax, union budget, union budget 2016, taxation for salaried man, salaried taxation, taxable income under new budget Currently, the EPF is fully tax-exempt at all three stages — deposits, accumulations and withdrawals — whereas NPS monies attract tax at the time of withdrawal.

In an attempt to equalise the tax treatment of the National Pension System (NPS) and the Employees’ Provident Fund (EPF), the Union budget has proposed that 60 per cent of an investor’s EPF corpus resulting from contributions made after April 1 be taxed at withdrawal. Currently, the EPF is fully tax-exempt at all three stages — deposits, accumulations and withdrawals — whereas NPS monies attract tax at the time of withdrawal. The budget seeks to exempt from taxation 40 per cent of NPS maturity proceeds. The purported objective here is to encourage competition between the NPS and the EPF by equalising their tax treatment and allowing employees to choose between them. One cannot quarrel with this objective per se, given that the EPFO is known to be an inefficient fund manager. But a level playing field could as well be achieved by exempting from taxation all withdrawals from the NPS.

PF Tax: Making Sense Of Govt’s Clarification

At the end of the day, both the EPF and NPS are social security schemes, not pure interest-earning, tax-saving instruments like the Public Provident Fund. Supporters of the budget proposal would argue that tax exemption at all three stages (EEE) is rare globally. Only one of 34 OECD countries (the Slovak Republic) follows the EEE taxation principle for private pension plans. The bulk follow EET, which even the latest Economic Survey has batted for. But this argument ignores a fundamental fact: India, unlike the rich OECD countries, has practically no social security schemes. People have to fend for themselves post-retirement, with monies saved during their working years. The least that the government can do is not tax an investor’s hard-saved pension corpus upon withdrawal in their twilight years. This logic holds greater force when one considers that long-term capital gains on the sale of shares are tax-exempt. While “long-term” is 12 months-plus here, EPF/NPS monies are locked in for decades before being withdrawn.

The finance ministry has clarified that the tax exemption would continue to apply to even the 60 per cent balance withdrawable corpus, if this amount is re-invested in annuity schemes. But this is financial paternalism. Whether a retiree chooses to put her EPF savings in an annuity, mutual fund or bank deposit should be left entirely to her; either way, there is no justification for taxation at the time of withdrawal of accumulations. It is one thing to argue for liberalising interest rates on the EPF by making these market-determined or allowing a greater portion of its corpus to be invested in capital markets. But that is different from removing tax exemption on withdrawals. Both the EPF and NPS are potential sources of long-term capital that the economy needs today to fund infrastructure and other long-gestation projects. The government should encourage such savings; it needs to present a more convincing case for not exempting their withdrawals from tax.

Keystrokes: EPF Tax

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