The Employees' Provident Fund is a retirement benefit scheme that was structured to provide financial security to employees of factories and other establishments post-retirement. It is administered by the Employees' Provident Fund Organisation (EPFO) whose highest body is the Central Board of Trustees, with representation from the government, employers and employees. The return on EPF is decided by the government every year. For 2015-16, the government has announced a small increase to 8.8% from 8.75% for 2014-15. EEE means that the investment in the EPF is tax-free at all the three stages of investing, interest accumulation, and withdrawal. The EEE status is also available to Public Provident Fund, equity linked savings schemes and life insurance policies. As part of its Budget 2016-17 announcements, the government has proposed to impose a tax on 60% of the corpus at the time of withdrawal. While concerns and apprehensions have been raised from various quarters including employees' representatives on the Central Board of Trustees, the government, in its clarification issued on Tuesday, said that "The Government has announced that Forty Percent (40%) of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS… It is expected that the employees of private companies will place the remaining 60 per cent of the Corpus in Annuity, out of which they can get regular pension. When this 60 per cent 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." Announcing the imposition of tax on 60% of the withdrawal amount from EPF, the government in its Budget document argued that it was being done to bring greater parity in the tax treatment of different types of pension plans. However, in its clarification issued on Tuesday, the government said, "The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account." Arguments in Favour of the Tax Some experts say that the government's move will make the NPS more popular among investors, as it allows investments to be routed to equity markets that have the potential to generate higher returns. Since the money can be routed to equity markets, it will free up the capital, and can be used in the growth of the economy. Another argument put forward by the government is that the move will force employees to place the 60 per cent of the corpus in annuity for getting a regular pension. Arguments against the tax Some argue that since the contribution to EPF goes from tax-paid income, if the government imposes tax at the time of withdrawal, it will be like taxing them twice on the same income. A majority of low income workers withdraw their EPF money in full at the time of retirement to buy a house or for other important purposes — and restricting them by imposing tax on 60 per cent of the corpus will erect hurdles in their achieving their goal. svk How Budget move on taxing Employees' Provident Fund will pinch you
What is the Employees' Provident Fund (EPF)? Why have governments insisted that salaried employees put a portion of their salaries in this Fund, and their employers put in a matching amount?
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Posted by: Srinivasan Venkatkrishna <svkiyengar@yahoo.com>
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