#RollBackEPF: Govt May Review EPF Tax After Intense Backlash

After backlash from salaried taxpayers, ministry says FM to take a look at EPF taxation in due course.

(Photo: iStockphoto)

The government while announcing the Union Budget on Monday said that contributions to the Employees Provident Fund (EPF) would become taxable.

The Budget proposed that only 40 percent of the withdrawals made from your EPF corpus after 1 April 2016 would be tax-free, implying that going forward you would have to pay a tax on the interest accrued on the remaining 60 percent of the corpus, at the time of withdrawal. This won’t apply to those who earn less than Rs 15,000 per month. (Livemint)

The move would directly affect 5 crore individuals who are currently invested in retirement savings scheme and led to a backlash from India’s salaried workforce. (Economic Times)

Why the Govt Proposed the EPF Tax

So far, withdrawal of EPF corpus after 5 years of continuous service was fully tax exempt. The new EPF tax was meant to bring EPF on par with the National Pensions Scheme (NPS) where 40 percent of the withdrawals on maturity have been made tax free. (Economic Times)

The move, the finance ministry explained, was aimed at encouraging private sector employees to go for pension security after retirement instead of withdrawing the entire money from the fund account. (Business Standard)

The Subsequent Clarification

After the sharp criticism that followed, Revenue Secretary Hashmukh Adhia said only 60 percent of interest on contributions made after 1 April 2016 will be taxed and that the principal amount of contribution will remain untouched at the time of withdrawal. (The Quint)

After heated discussions inside and outside Parliament, the Finance Ministry said Tuesday it is considering “various demands” on the issue, including levying tax only on accumulated returns on the corpus and not on the contributed amount. (The Indian Express)

On Tuesday, Minister of State for Finance Jayant Sinha released a press note, by way of clarifications.

What the EPF Tax Could Mean for Your Savings

If the government goes ahead with the tax on the interest accrued on PF contributions after April 2016, a person starting his career after this could lose 18 percent of his entire retirement savings at provident fund maturity. Even those in the middle of their career face the prospects of losing between Rs 10 lakh and Rs 20 lakh (12- 8 percent) of their retirement corpus. (The Times of India)

AK Padmanabhan, board member of the Employees’ Provident Fund Organisation or EPFO’s Central Board of Trustees (CBT) and president of CITU, said: “Beyond a nominal lock-in of just 12 months, the government is willing to completely exempt from tax an investment by a person in the equity markets. But it now wants to tax life-long savings of a worker, accrued from tax-paid income, even after a lock-in of 25 years. How logical is that?” (The Indian Express)

Salaried Taxpayers Lash Out at Govt

Outraged salaried taxpayers took to Twitter with the hashtag, #RollBackEPF, to express their anger against the proposal.