The Union Budget 2016-17 has been slated as a Budget for Bharat that clearly indicated a shift in focus to the rural economy, Finance Minister, Mr Arun Jaitley introduced a slew of taxes and cess to be imposed on services to help rural welfare programmes. But, one proposal that created a lot of commotion between salaried class and in the Parliament was “To tax EPF withdrawals” which ultimately lead to the volte-face by the Government. This story brings all the insights behind the EPF, the budget draft and the decision to roll back the proposal.
What is Employee Provident Fund (EPF)?
A provident fund is created with a purpose of providing financial security and stability to elderly people. Generally one contributes in these funds when one starts as employee; the contributions are made on a regular basis. The investments made by a number of employees are pooled together and invested by a trust.
Employee Provident Fund (EPF) is one of the main platforms of savings in India for nearly all people working in private sector organizations. EPF is implemented by the Employees Provident Fund Organisation (EPFO) of India. EPFO is a statutory body of the Government of India under Labour and Employment Ministry. An organization with 20 or more workers working in any one of the 180+ industries should register with EPFO.
|Scheme Name||Employee Contribution||Employer Contribution|
|Employee provident fund (EPF)||12%||3.67%|
|Employee’s Pension Scheme (EPS)||8.33%|
From the employee’s basic salary, 12 per cent of it goes to his EPF account while the employer also contributes an equal amount. However, not all amount of employer’s contribution moves into employee’s EPF but only 3.67 per cent is diverted into it. The balance i.e. 8.33 per cent of employer’s monthly contribution moves into EPS. From September 1, 2014, EPS is only for those new members earning less than Rs 15,000.
Also, in Budget 2016, the Government proposed to pay 8.33 per cent for all new employees for first three years of employment. A total of Rs 1,000 crore has been allocated towards it. The scheme will be applicable to those with salary up to Rs 15,000 per month (threshold limit for EPS). The move is expected to help ease the employer’s burden to some extent.
TYPICAL EPF BENEFIT CALCULATION
The purpose of the Employee’s Pension Scheme (EPS), 1995 is to provide pension in following situations:
|Superannuation (15000/- month)||Age 58 years or more and at least 10 years of service|
|Before superannuation or Retiring Pension/Early Pension||Age between 50 and 58 years and at least ten years of service|
|Death of the member||Death while in service: At least 1 months service
Death while not in service: Age less than 58 years & Holding valid Scheme certificate or proof of service
|Permanent Total Disablement Pension||Permanent disability|
Current Situation and the Budget Proposal
The Union Budget of 2016-17 included two proposals. In the recent budget, the Government proposed that withdrawal in excess of 40 per cent of the accumulated corpus will be taxed.
|PROPOSAL I||PROPOSAL II|
|BUDGET PROPOSAL||Tax- free withdrawal up to 40 per cent of the accumulated corpus||Rs 1.5 lakh limit on tax free EPF contribution by employer|
|CURRENT STATUS||Entire corpus can be withdrawn tax-free||Up to 12 per cent of basic salary tax-free|
How it would affect a Salaried Employee.!!
The budget proposal to tax EPF withdrawals has a potential to change the portfolio of investment for the salaried class.
The capital gains from equity funds and balanced schemes are tax-free after one year. The gains from debt funds are also taxed at 20 per cent after three years, but the indexation benefit (benefit which allows marking the cost of purchase with inflation i.e. factor in the inflation to bring the historic cost of purchase to today’s value) reduces the tax significantly. In comparison, the Budget proposal to tax the Provident Fund corpus will force the investor (employee) to shell out 30 per cent tax on 60 per cent of the corpus at the time of maturity.
According to a report published in The Economic Times on March 7, an HR professional working in a telecom firm in Gurgaon quoted “Till last year, employees used to ask for higher basic salaries so that their Provident Fund contribution is also higher. Now they are asking for other benefits instead of a higher Provident Fund”.
Mr. Manoj Nagpal, CEO, Outlook Asia Capital stated “If there is no tax deduction, the amount an employee contributes to the Provident Fund effectively comes out of his post-tax income. Only the portion of the corpus that claimed deduction under Sec 80C should be taxed. Taxing the corpus that has not claimed deduction will amount to double taxation”.
The Government raised many concerns among the unions and the salaried class, when it proposed to tax the EPF withdrawals. In the budget, Mr Jaitley had said “idea behind the proposal was not to raise revenues but to achieve the policy objective of creating a pensioned society”. The growing resentment from outside as well as from inside the party left the Finance Ministry with no alternative but to roll back the proposal on March 8. Mr Jaitley said that the matter would be reviewed and officials believe the Centre will need to do more homework before looking at an alternative proposal.
Some news dailies quoted that the proposal is off the table for time being. As quoted by Mr. Girish Vanvari, KPMG India Head (Tax) “A roll back in the provident fund amendment is a step in the right direction and once again demonstrates the commitment of the government to a consultative process and its willingness to listen”.
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