The current government's announcement in the Union Budget 2016 to tax employees provident fund withdrawal by 60 per cent after April 1, 2016 onwards, has kept the opposition and pretty much the entire India on its feet for the last two days.
Onmanorama brings you the entire issue in a much simplified form.
What is Employees Provident Fund?
Now, this is a scheme that benefits the employees post their retirement. It provides a financial security to employees working in factories and other organisations. This scheme is managed by the Employees Provident Fund Organisation (EPFO) which includes Central Board of Trustees, with representatives from the government, employees and employers.
How do we get this financial security post retirement?
All those employees earning a salary up to Rs 15,000 per month are required to contribute 12 per cent of the basic salary and the dearness allowance every month. The 12 per cent has to be contributed by the employer to the respective employees fund in two forms: one being the EPF which is 3.67 per cent and the other one being Employees Pension Scheme, which is 8.33 per cent.
Hoping that is cleared let us try to understand what the EPF tax row is.
Until now, the EPF used to be EEE meaning Exempt-Exempt-Exempt. In simpler terms, the investment that is made in EPF is tax free at all the three stages which is investing, interest accumulation and withdrawal.
This is practised even in the case of Public provident fund, equity based savings schemes and life insurance policies.
What did the current government suggest in this budget that angered the public?
This time the government decided to impose tax on the withdrawal of the contributions made after April 1 to EPF and other schemes. A scheme on which it was tax free until February 29, 2016.
When everyone including the above said the Central Board of Trustees, the employees representatives, etc started creating commotion over the proposal, the government gave a clarification.
The government clarified by saying that 40 per cent of the whole amount withdrawn at the time of retirement will be tax free. The rest 60 per cent remains taxable unless the employees of the private companies invest them in annuity which then they can get a regular pension out of the amount. So when the 60 per cent of the total amount is placed in the annuity then it will not be taxable.
In short the entire amount still stays tax free that is if you do it in the way government asks you to invest. In government's defence, they are encouraging a behaviour of investing in annuity (a fixed sum of money paid to someone each year, typically for the rest of their life) for private employees instead of withdrawing the entire money in one go.
Now how does this impact the investors or the public?
The government has made it clear that the contributions made until March 31, 2016 will not be taxable and that this tax imposition will only happen to those withdrawals made after April 1, 2016.
Those who are planning to pull the entire amount of the fund at the time of retirement will have a reduced amount as their outcome unlike their expectations but those who plan to invest the 60 per cent in any form of annuity, they will benefit by getting a regular amount in the form of pension after retirement.
What are the advantages that the government is saying about the EPF tax?
1. Will bring equality among provident fund, pension fund and the National Pension System.
2. Will allow people to choose a product based on the risk and returns that it offers than choosing the tax benefit they offer.
3. Encourages people to invest in an annuity leading them to get a regular amount of pension post retirement.
What are the disadvantages of the EPF tax?
1. EPF is a main source of saving for most of the low income group and by imposing tax on it, their huge and long-term savings are being taken away by the government.
2. Most of them will have dreams to buy or invest this EPF in different way possible, but now they are just being given only one option by the government.
Will the Govt do a partial rollback? Wait and see, says Jaitley
As of now finance minister Arun Jaitley has said that he will spell out his final stand on taxing EPF withdrawals in the debate on budget in parliament. This development has come after the government hinted on Tuesday of a partial roll-back.
"The EPFO has about Rs3.7 crore members of which about Rs3 crore members are those in the earning category of Rs15,000 and below (statutory wages). For them there is no change," Jaitley said. "It is only those private sector employees who have just joined that this will impact them."