Aiming to give partial relief to those contributing to NPS, budget has given exemption of 40 per cent at the time of withdrawal in order to encourage retirement savings and to bring parity amongst NPS and other retirement saving plans i.e. Employees Provident Fund (EPF) and Public Provident Fund (PPF).

In the same breadth, Finance Minister, Arun Jaitley has also proposed to apply the same norm to EPF withdrawal on corpus created after April 1, 2016, which came as a shock to the salaried class, who were free to use their retirement savings as they wished, for marriage/education of their kids, medical exigencies, etc.

Considering the hue and cry on the proposal to tax EPF from the salaried class of taxpayers, the Revenue Secretary Hashmukh Adhia immediately after the budget session explained that PPF shall remain out of the purview of this proposal and hence shall continue to enjoy the EEE status and also that only the interest component of the contribution to EPF post April 1, 2016 shall be taxed.

As per the proposes amendment, any payment in commutation of an annuity purchased out of contributions made on or after the 1st day of April, 2016, which exceeds forty per cent of the annuity, shall be chargeable to tax. Until now withdrawal of EPF corpus after 5 years of continuous service was fully tax exempt.

Against this backdrop, in the below table we have analysed the impact of the proposal on retirement savings of individual in different age groups:

Tax for youth - Union Budget 2016

As can be seen above, the youth of India is most affected, and the proposal to tax EPF may discourage them to save for their retirement.

Government’s argument to support the proposal is that they want to bring parity between National Pension System (NPS) and EPF, by taxing 60 per cent of the interest on EPF withdrawal, if it is not invested in annuity. NPS has failed to get the number of subscribers it expected because the scheme does not generate as high post-tax returns as the EPF does.

In the absence of a social security arrangement which is there in the western world, retirement savings in India are of paramount importance to salaried group which is created to take care of their sunset years, when healthcare cost in itself is a huge cost.

FM has been quoted saying that the proposal is not to mobilise revenue, but only to make India a Pensioned Society, hence, the proposal to tax PF withdrawals should be rolled back before the bill becomes the Act, to encourage people to save for retirement.