EPF tax proposal withdrawn, finally

Moneylife Digital Team 08 March 2016

After an uproar and backlash from taxpayers, especially EPF subscribers, Finance Minister Arun Jaitley decided to roll back his proposed EPF tax

After facing opposition from taxpayers, the Indian government on Tuesday announced withdrawal of its controversial proposal to levy tax on employee’s provident fund (EPF). "In view of representations received, the government would like to do a comprehensive review of this proposal and therefore I withdraw the proposal," Finance Minister Arun Jaitley said in a suo motu statement in the Lok Sabha. He however clarified that 40% exemption given to National Pension Scheme (NPS) subscriber at the time of withdrawal remains.

On 29th February, Finance Minister Jaitley, while presenting the Budget announced that in order to bring parity in the pension system 40% of the corpus withdrawn at retirement will be tax exempt for both the NPS and Employee Provident Fund EPF. This meant that 60% of the EPF corpus, which is now tax exempt, will be taxed.

This led to an uproar from the middle class demanding a roll back. An online petition demanding the withdrawal of the taxation of the EPF corpus soon went viral on social media. The petition now has over 2.5 lakh supporters.

The budget announced that 40% of the corpus withdrawn at retirement will be tax exempt for both the NPS and EPF. The balance corpus withdrawn will be subject to tax. However, if the corpus is transferred to an annuity, it will be tax exempt. (Earlier, the entire 60% of the corpus withdrawn from NPS was taxable and the entire interest earned under EPF was tax-free). This has led to a backlash from EPF subscribers. Attempts to clarify the new norms have led to more confusion.

Revenue Secretary Hasmukh Adhia clarified that only the interest accrued on EPF contributions made after 1 April 2016 will come under the new proposal. Therefore, 40% of the interest accrued on contributions made after 1st April will be tax exempt and its remaining 60% will be taxed. This 60% will also be tax exempt if it is invested in pension annuity schemes, he added. This contradicted both the Finance Minister (FM)’s speech and the Finance Bill, which was quite clear about what the government intended to do.

A clarification issued by the Ministry of Finance stated that, “It is expected that the employees of private companies will place the remaining 60% of the corpus in annuity, out of which they can get regular pension. When this 60% 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.” This contradicted with what Adhia had said that only interest will be subject to tax.

Finally, the issue was discussed at a high-level meeting between officials of the Prime Minister's Office (PMO) and the Finance Ministry on 3rd March.

The proposal would not have impacted 3.26 crore subscribers of Employees Provident Fund Organisation (EPFO) drawing statutory wage of up to Rs15,000 per month. EPFO has a total subscriber base of 3.7 crore.

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