What is the controversy all about? In dire need to generate revenue for the government's rural push, Jaitley has decided he will tax 60 per cent of whatever amount you accumulate in the EPFO from April 1, 2016. In simple language, when a slaried person reaches the age of 58 and retires from work, he will get 40 per cent of the corpus with interest and without being taxed but he will be taxed for the remaining 60 per cent contribution made from April 1,2016, unless he invests that amount in any other annuity scheme like a pension scheme. Mind you, all annuity schemes are also taxed at the time of maturity or withdrawal. In effect, henceforth you will not be able to escape paying tax on bulk of the EPFO contributions that you and your company make.
As expected, Jaitley stoked the hornet's nest with this. It is not illegal to try and tax the principal of a corpus that is intended as retirement benefit but it sure borders on the unethical. The middle class, which did not get much from the budget anyway, is up in arms and Jaitley is a much derided person on twitter. #RollBackEPF is trending.
Trust BJP to let the narrative change from +ve to -ve themselves. See how #EPF has changed narrative of otherwise decent disciplined budget.
Think of this: An 8% return in EPF for 15 years more, with the new rules, is a post-tax return of 5.71%.
#RollBackEPF No capital gains tax for rich equity investors after 12 months, but EPF to be deposited for multi years will be taxed..
nikhil wagleVerified account@waglenikhil
By touching EPF @arunjaitley proved he doesn't care for middle class who voted for BJP in 2014 LS election. Govt will have to roll back.
Yet, the more perplexing thing is that the fine print in the Finance Bill itself contradicts Jaitley's budget speech. While the minister said the enitre corpus - you and your company's contribution and the interest accrued on that - would be under the ambit of taxation, the Finance Bill instead says only the contribution made by the employee with interest would be taxed. The contribution by the employer, which is of the same quantum, would be untaxed.
Clearly, it is an oversight on whoever wrote Jaitley's speech and who drafted the Finance Bill. It would be ironic if that is the same person. Further, such callousness in writing the element that would cause the most discomfort to the government is also ironic, if not tragic.
Even after the issue became a full blown controversy, the government continues to bumble its way through. Early on Tuesday, revenue secretary Hasmukh Adhia clarified that only the interest on 60 per cent of the EPF contribution and not the entire principal amount would be taxed. It would have acted as a big relief and saved the government blushes. Yet, a couple of hours later, the finance ministry released a clarification stating no such change has been made but a demand to that effect is under consideration.
"So the confusion continues on the taxability of EPF withdrawal. The budget speech said withdrawal from EPF up to 40 per cent of the corpus will be tax free. EPF corpus consists of employer's contribution, employee's contribution and interest on both," says Sonu Iyer, Tax Partner & National Leader - People Advisory Services, EY. Thus 60 per cent of the total corpus will be taxable on withdrawal. However, the Finance Bill says withdrawal from EPF up to 40 per cent of the accumulated balance attributable to contributions made by an employee will be tax free - which means that the balance 60 per cent of only employee's contribution will be taxable. This also means that the employer's contribution continuous to be fully tax free. Then, as per media reports, the Revenue Secretary made a statement this morning saying principal amount will be fully tax exempt while only 40 per cent of the interest accrued on the PF accumulation will be tax free - which means that the balance 60 per cent of only interest accrued will be taxable.
The latest Press Information Bureau (PIB) release earlier this afternoon takes us back to the budget speech and reiterates that intention of the proposal is to exempt 40 per cent of total corpus, while the other 60 per cent of the corpus will be taxable unless invested in an annuity plan. Amidst all this confusion, the silver lining is that as per the PIB release, the Finance Minister will consider the various suggestions received on this matter and will take a view in due course. From a point of view of taxation of income, if at all there is a case for taxation then it would be for taxing interest income and employer's contributions upto Rs 1,50,000 because the rest of the corpus is built up from tax paid income.
Perhaps the controversy will throw light on the merit of EPF scheme itself and highlight the option that rests with employees but rarely used. Introduced ironically by Jaitley himself last year, anybody earning more than Rs 15,000 per month can opt to not contribute to EPF. The scheme gives a standard 8.33 per cent return on the investment, which just about covers inflation. The money is mostly invested in government securities that give one of the worst return on capital.
Having worked all his life and regularly invested in such a low yielding scheme, the government should think of rewarding and not taxing a person who is retiring. On any given day, the government has no business deciding what a 58-year-old man wants to do with his money and forcing him to buy another annuity scheme.
There is no doubt Mr Jaitley did not intend to scare employees away from EPFO, but it would be in his own interest to set his house in order and clarify on this tax. And least of all, fire his speech writer.