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Axe This Proposal

60 per cent, the size of the Provident Fund corpus of an employee that is proposed to be taxed on withdrawal

Photo Credit : Sanjay Sakaria

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Finance minister Arun Jaitley’s Budget proposals have angered two of the three very segments that voted the NDA government to power, namely the middle-class, farmers and the super rich. While taxing the super rich, the proposals have made every day products and services costlier for the middle-class due to an increase in service tax and cess.

But what has angered the middle-class tax payers more is the proposal to tax 60 per cent of the employee contribution to Provident Fund (PF) made on or after 1 April, 2016 on withdrawal. At present, the Public Provident Fund (PPF) and the Employee Provident Fund (EPF) enjoy exempt-exempt-exempt (EEE) status. However, in the case of the National Pension Scheme (NPS), taxes are levied at the time of withdrawal. Jaitley’s explanation was: “My aim is to bring superannuation and PFs in line with the NPS tax structure.”

As per reports, NPS is said to have 1.15 crore subscribers and asset under management of around Rs 1 lakh crore. The EPF subscriber base is 3.7 crore and the corpus stands in excess of Rs 6.2 lakh crore.

“I believe the tax treatment should be uniform for defined benefit and defined contribution pension plans. I propose to make withdrawal up to 40 per cent of the corpus at the time of retirement tax exempt for NPS. In case of superannuation funds and recognised PFs, including EPF, the same norm of 40 per cent of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016,” is how the budget spread read.

According to Kuldip Kumar, partner and leader, Personal Tax, PwC India: “The high-salaried class is worst hit due to their higher contribution to PF. Employer’s contribution in excess of Rs 1,50,000 may get taxed twice, once at the time of contribution and again on withdrawal in excess of 40 per cent.”

This has angered the salaried class. “Just to bring in parity and make NPS popular how can the FM announce such a move? It should be withdrawn,” says a senior Congress leader.

Amidst the backlash, the ministry clarified three important aspects of this Budget proposal. One, PPF will not be taxed on withdrawal; two, only the interest that accrues on contributions to EPF made after 1 April will be taxed, principal amount will continue to be tax exempt; and three, Jaitley will consider all suggestions and take a call in due course.

“From the point of view of taxation of income, if at all there is a case for taxation then it would be for taxing interest income and employer’s contributions up to Rs 1,50,000 because the rest of the corpus is built up from tax paid income,” says Sonu Iyer, tax partner & national leader - People Advisory Services, EY.