Union Budget 2016-17 holds another tax whammy for employees’ provident fund savings which will particularly hurt millions of low-income workers earning as little as Rs.5,000 a month.
Such employees would be taxed at the highest marginal income tax rate of 34.6 per cent if they withdraw EPF savings of Rs 50,000 or more, before completing five years of continuous service. The tax, officials said, is to be levied at the highest personal tax rate for those members who don’t have a PAN card, according to the Finance Ministry. For those with a PAN card, the tax is levied at 10.3 per cent.
“Those with a balance of just Rs.50,000 in their EPF account, after, say 59 months of service, are essentially low income workers who are not liable to pay tax to begin with. Yet they will be taxed at the rate applicable for those earning over a crore of rupees a year,” a senior labour ministry official said.
To put that in perspective, banks deduct income tax at 10.3 per cent on interest income of over Rs.10,000 earned from fixed deposits. In cases where a depositor hasn’t shared his PAN card details with the bank, such interest income is taxed at 20.6 per cent. Separately, a PAN number is mandatory for jewellery purchases over Rs. one lakh. Personal income is tax-free in the country for those earning about Rs.21,000 a month or Rs.2.5 lakh a year.
An EPF account is mandatory for all employees earning up to Rs.15,000 per month (raised recently from Rs.6,500 per month) in firms employing over 20 workers. As per the law, 24 per cent of an employee’s salary is contributed to EPFO as a social security net for old age – a part of that (8.33 per cent) is diverted to an employees’ pension scheme (EPS).
The annexure to Part B of Finance Minister Arun Jaitley’s Budget speech, which deals with direct tax proposals, sets a Rs.50,000 threshold for deducting tax at source on EPF savings withdrawn before five years of service under section 192A of the Income Tax Act. The limit was set at Rs.30,000 last year, when the TDS provision was first introduced.
“We have repeatedly told the finance ministry to review the Rs.30,000 ceiling and do away with this highest tax rate provision for those not having PAN cards. If savings beyond a threshold have to be taxed, they could be taxed at 10 per cent. But they have raised the threshold by a ridiculous amount and refused to accede our request to lower the effective tax rate,” the official said, adding that nearly 85 per cent of EPF members don’t have PAN cards.
According to The Hindu’s calculations, verified with tax and retirement savings experts, those earning around Rs.5,400 a month (or as little as Rs.65,000 a year) and covered by the EPFO would accumulate around Rs.50,000 in 59 months, even without factoring in the annual interest credits. This assumes 15.67 per cent of the salary is deposited into the EPF account, with the rest invested in the EPS.
The labour ministry official stressed that the government doesn’t guarantee five years of continuous service in a firm covered by the EPF Act and cannot penalise an employee if they are forced to change their employment from a large firm to a small firm, or lose their job before the five year cut-off period.
“This is a very regressive move and would not only lead to taxing those who are not part of the tax net or pushing them to get a PAN card though their income is well below the taxable limit, but also create a huge compliance and paperwork headache for employers as well as the EPFO, who would have to issue tax deduction certificates,” said Amit Gopal, senior vice president at India Life Capital, a firm that advises corporate India on retirement funds.
The government has defended its proposal to tax 60 per cent of EPF savings as a tool to push people into the pension habit and said that only high-income workers would be affected, while those earning upto Rs.15,000 a month won’t be taxed.
Senior officials in the labour ministry and EPFO have argued that those earning over Rs.1.8 lakh a month cannot be considered high-income workers.
“Why should someone who earns between Rs. 0.8 lakh and Rs.2.5 lakh a year, be required to pay tax on his savings at the time of retirement? Such members never claimed a tax deduction n her or his EPF contribution to begin with,” the official said, adding the same logic applies in the case of tax on premature withdrawals.