The Great EPF Taxation Flip-Flop – Where Do We Stand Now?

EPF taxation

Amidst all the hullabaloo over the Budget 2016-17 proposal to tax 60 per cent of withdrawals from the Employee Provident Fund (EPF) corpus, other important announcements pertaining to changes in EPF rules have been more or less overlooked. Such was the sound and fury over the taxation proposal that the other changes simply got lost in the din. That the proposal has, since, been withdrawn has not quite quelled the storm, and the issue continues to be debated animatedly.

It all started with Finance Minister, Arun Jaitley, making this statement while delivering the Budget speech: “I propose to make withdrawal up to 40 per cent of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. 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 April 1, 2016.”

The EPF taxation blow

The cleverly worded sentence could not quite hide the low blow dealt to the salaried class that their hard-earned money tucked away safely in the EPF corpus would now be taxed, albeit only 60 per cent of it, unless it was invested in an annuity fund. This corpus had, hitherto, remained completely tax-exempt.

The proposal to tax 60 per cent of EPF withdrawals was supposed to be in line with the National Pension System (NPS), and other pension plans, where the government has proposed to exempt 40 per cent of the corpus from tax at the time of withdrawal. An important point to note is that the NPS was fully taxable at withdrawal, till Budget 2016-17 gave it some relief.

Soon after the announcement, all hell broke loose, with the print media, electronic media, social media, the salaried class, the literati, the chatterati, and any and everybody pouncing upon this one aspect of the change in the EPF rules. More on that later.

Meanwhile, equally important announcements had already been made. So, technically, it all started not on February 29, but on February 10, when changes to EPF rules were first announced.

The February 10 announcement

As per a new rule notified by the Ministry of Labour and Employment on February 10, if a person, after being unemployed for two months, or more, wishes to withdraw money from the EPF account, he or she can only withdraw his or her own total contribution, and interest earned on it (which was raised to 8.8% recently). The employer’s contribution, and the interest earned on it, can only be withdrawn after one reaches 58 years of age.

Earlier, if a person was unemployed for two months, or more, he or she could withdraw the entire amount (both employee and employer’s contribution, and interest earned on it) accumulated in his or her EPF account. What this means is that if you have an EPF account, your relationship with EPFO will be active till you retire, or die.

This can have serious consequences on the financial planning of salaried individuals. For instance, if you want to withdraw money from your EPF account to start your own business before retirement, or for some other reason, you will not be able to withdraw the entire amount, but just about 50 per cent of it.

There is an exemption for women employees if they leave their job for marriage, pregnancy or childbirth.

The notification is not very clear about whether the employer’s contribution that will be locked in till a person attains 58 years of age will earn interest or not. Presently, the rules stipulate that a provident fund account becomes dormant or inoperative if no contribution has been made for a period of 36 months. No interest is paid on such a dormant account.

Another change brought in by the February 10 notification increased the retirement age for EPF from 55 years to 58 years. One can apply for pension only at 58 now.

Rollback of Budget Proposal

Let’s go back to the February 29 proposal. Seldom has a budgetary proposal met with as much of a hue and cry as did the announcement to tax 60 per cent of withdrawals from the EPF corpus. The tax proposal sparked a severe backlash from the professional class, with some calling it a raid on the retirement savings of honest taxpayers. A Twitter hashtag, #RollBackEPF, started trending, and the rest of the social media pitched in with all guns blazing.

“The policy objective is not to get more revenue but to encourage people to join the pension scheme,” Jaitley said in a statement to lawmakers, but to no avail. The proposal came under fire from all quarters and also drew flak from opposition parties, forcing the government to do a re-think ahead of elections in five states.

In the face of severe criticism, Jaitley, on March 8, announced a rollback of the proposal to tax EPF withdrawals. The tax would, anyway, have yielded only Rs 300 crore from 42 lakh workers. The finance minister also withdrew the proposal to impose a monetary limit on contributions by employers to the provident and superannuation fund at Rs 1.5 lakh for availing the tax benefit. The 40 per cent exemption given to subscribers of the NPS at the time of withdrawal remains in place.

But do remember that withdrawals from the EPF within five years of joining are still taxable.

Is this the happy ending? Not quite!

If you were hoping that the March 8 rollback would mark the end of the EPF taxation controversy, think again. The grapevine has it that the tax may return in a new packaging.

The Times of India, in its editorial dated March 11, says: “Soon after withdrawing a misconceived tax on EPF, the government is again exploring ways to meddle with the scheme through the instrument of Employees Pension Scheme. This can only lead to anxiety among the salaried middle class as years of careful planning can unravel instantaneously.”

So, what is the latest twist all about?

Well, there is a proposal to vastly increase the proportion of EPF going into the EPS for employees above the salary threshold of Rs 15000 per month. A report dated March 15, says that the EPF tax is likely to return, with a different name and approach.

The finance ministry seems to be figuring out ways and means of levying the EPF tax on people who earn higher salaries. The new version of the EPF tax, if it does materialize, will be well-deliberated and well-planned, and the government will be ready with a plan to effectively counter a backlash. In fact, it might not even be called a tax; you might hear some other fancy nomenclature.

So, stay tuned to new announcements, and don’t get taken in by seemingly innocuous statements.

Suneeta Kaul is a journalist, a writer, and a blogger. She tracks the economy, the corporate sector and the stock markets, and is a keen follower of current events. Having started her career with The Economic Times, she has worked for publications such as The Asian Age, Business India, and Thomson-Reuters, among others.