So the finance Minister has ultimately decided to give level playing field in respect of pension products and has proposed withdrawal from employee provident fund balance, created with employee’s contribution made after 1st April 2016, taxable to the extent of 60% and 40% exempt. In my opinion these provisions have either been drafted in a hurry or have deliberately been made to be unjust to salaried people. I have a feeling that the government treats the most honest class of tax payers i.e. salaried as second class citizens. Here is why I feel so.
Excluding Public Provident Fund out of the net
Since the salaried always had the option to accumulated their retirement kitty through contributions to employees provident funds, the public provident fund (PPF) scheme was introduced in 1969. Though the initial tenure of the scheme is 15 years and extendable but the underlying purpose of introducing the scheme is to help the tax payers accumulate their retirement kitty and claim the tax benefits too. The route of PPF is mainly used by the self employed people as against the Employee Provident fund route used by the salaried people. By making the employee provident fund withdrawal partially taxable and leaving PPF out is just unjust to the salaried class as a whole at the cost of the self employed people.
Restriction on deduction available for employer for contribution made to employee EPF account
The finance minister is also proposing that any contribution above Rs. 1.50 lacs to provident fund by the employer shall be added back to the income of the employee. Presently there is a limit of 12% of the salary without there being any restriction in terms of absolute amount up to which employer’s contribution does not have any tax implication for the employee. These rules are proposed to be amended to provide for an absolute limit of 1.50 lacs within 12% of salary. Any contribution above Rs. 1.50 lacs shall be added to the income of the employee and the employee shall have to pay tax on such excess contribution.
Since the government does not provide any significant social security to its citizen, it should at least not discourage its citizen to create the corpus for old age by taxing the contribution above certain amount. This provision will force the employees to opt for the minimum provident fund contribution upto Rs. 1.5 lacs only and balance as immediate payment rather than paying taxes on excess contribution. This will result into accumulation of inadequate corpus at the time of retirement of the employee.
As against this there is no such cap on the maximum contribution an employer can make to NPS account of the employee as long as the same does not exceed 10% of the salary as pr Section 80 CCD as presently worded. So it seems the NPS subscriber is at advantage here as well over the EPF subscriber.
Immediate Taxability of 60% of the employee provident fund withdrawal without option to buy annuity
As per the proposal in the budget 40% of the amount shall become exempt in respect of EPF and NPS and the balance 60% shall become taxable at the time of withdrawal. However the NPS subscriber has to buy an annuity for upto 40% of the accumulated balance in the NPS account and can even go for 60% of the accumulated balance for buying the annuity. Such act of using the corpus for buying an annuity is not treated as receipt of the money from NPS as per provisions of Section 80CCD(5). Though the annuity received from insurance company is taxable but the same is taxed at quite a lower rate than the rate which applies to the lump sum payments received. As per my knowledge no such exemption presently exists in case the balance 60% of the accumulated balance in EPF is used for purchase of an annuity. So the NPS subscriber is still has the option to save or at least defer the tax by investing 60% in annuity the EPF subscriber does not have any such choice and has to invariably pay tax on 60% of the accumulated balance. So where is the level playing field?
There is over crowding of Section 80 C. The amount eligible for deduction under Section 80 C is generally very high as compared to the limit of RS. 1.50 lacs due to various reason. The fact that most of the people buy their residential house with the help of home loans and looking at the prices of residential units the most of the principal repayment does not fetch any tax benefits to the tax payer. So effectively the employee’s contribution to EPF does not get the tax benefit if we appropriate the principal repayment towards eligible amount under Section 80C. So even if no tax benefits could be claimed due to the reasons stated above there is no provision to exclude such amount while calculating the taxable 60% on withdrawal.
Switching provision from EPF to NPS
As per the annexure to the Finance Finisher’s speech the government also proposes to provide exemption for one-time portability from a recognised provident fund or superannuation fund to National Pension System. As I understand the funds transferred from Superannuation fund or provident fund to NPS account will not be treated as having been received by the employee and thus will not attract any tax. What about it being taxable when it is withdrawn from NPS account? As of today all your accumulated balance is in EPF account is fully exempt and it is only the incremental contributions made by you after 1st April 2016 which with interest will become taxable to the extent to 60%. No such provision is there in case of NPS account so even 100% of the EPF balance which is exempt today once transferred to NPS account will be subject to mandatory 40% annuity purchase obligation and 20% tax on your withdrawing it after 60 years of age. So why would you shift your present balance in EPF to NPS and made yourself subject to stringent conditions of NPS later on.
I feel the Finance Minister will have to address all these issue before the proposals are actually made into law.
The Author is CA, CS and CFP and presently working as Company Secretary of Bombay Oxygen Corporation Limited. He can be reached at jainbalwant@gmail,.com