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After a taxing week, Employee Provident Fund tax free again
March, 09th 2016

Finance Minister Arun Jaitley Tuesday announced a rollback of his budget proposal to tax 60 per cent of the employee provident fund (EPF) corpus at the time of withdrawal and said that the government would do a “comprehensive review” of the proposal. This comes on the back of attacks from contributors, MPs and employee unions, including the BJP’s own trade union wing, the Bharatiya Mazdoor Sangh.

Making a suo motu statement in Lok Sabha, Jaitley also announced a rollback on the proposal that imposed a tax on the employer’s contribution of over Rs 1.5 lakh.

“In view of the representations received, the government would like to do a comprehensive review of this proposal and, therefore, I withdraw the proposals made in para 138 and 139 of my budget speech. The proposal of 40 per cent exemption given to NPS subscribers at the time of withdrawal remains,” he said.

Para 138 of Jaitley’s budget speech said: “In case of superannuation funds and recognised provident funds, 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.” Para 139 said: “Further, the annuity fund which goes to the legal heir after the death of pensioner will not be taxable in all three cases. Also, we are proposing a monetary limit for contribution of employer in recognised provident and superannuation fund of Rs 1.5 lakh per annum for taking tax benefit.”

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The budget announcement relating to EPF taxation drew strong criticism from the employees’ representatives on the board of the Employees’ Provident Fund Organisation (EPFO) and they threatened to hold nationwide agitation if the proposals were not rolled back.

In its defence of the proposal immediately after the budget, the Finance Ministry had maintained that out of around 3.7 crore contributing members of EPFO, nearly 3.26 crore subscribers were within the statutory wage limit of Rs 15,000 per month and for them, there wouldn’t be any change in the new dispensation.

Though the government clarified that the money would not attract tax if the contributor were to put 60 per cent of the corpus in annuity products of insurance companies, even this came under fire. “A number of representations have been received from various sections of the society including members of Parliament suggesting that this change will force people to invest in annuity products even if they are not willing to do so,” Jaitley said.

While parliamentarians stated that employees should have choice of where to invest, Jaitley said, “Theoretically, such freedom is desirable but it is important for the government to achieve policy objectives by the instrumentality of taxation.”

He also clarified that the policy objective is not to get more revenue but to encourage people to join the pension scheme.

Even as he announced rollback of the proposal, the Finance Minister said that the purpose of the proposed reform in the tax regime was 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.

 
 
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