After a week of severe criticism, the government has finally withdrawn the proposed scheme to tax Employee Provident Fund (EPF) withdrawals. In his budget speech, Finance Minister Arun Jaitley had proposed to tax 60 per cent of the corpus of the EPF contributions created after April 1, 2016 at the time of withdrawal.
“In view of the representation received, the government would like to do a comprehensive review of this proposal and therefore I withdraw this proposal,” Jaitley said in a suo motu statement in the Lok Sabha.
However, the 40% rebate proposed for the NPS will continue. NPS is at present fully taxed on withdrawal. This is a relief for NPS subscribers.
“The proposal of 40 per cent exemption given to NPS subscribers at the time of withdrawal remains,” the Minister clarified.
The proposal to tax EPF withdrawals had come under fire from both employee unions and political parties even though the proposal exempted the tax if the amount was invested in pension annuity scheme.
Jaitley said that various sections of the society including MPs suggested that this change would force people to invest in annuity product even if they are not willing to do so.
“The main argument is that the employee should have choice of desire where to invest. Theoretically, such freedom is desirable but it is important for the government to achieve policy objectives by the instrumentality of taxation…In the present reform the policy objective is not to get more revenue but to encourage the people to join the pension scheme. There are various suggestions received, which can also achieve the same policy objective of encouraging people to join the pension scheme,” Jaitley said in his statement.
The government has also withdrawn the proposal to limit tax-free contribution by the employer to the provident fund of an employee to Rs 1.5 lakh per annum.
Earlier, the government had justified the tax on EPF withdrawals by saying that it was an attempt to create a pensioned society and encourage employees to invest their savings in annuities.
A day after the Budget, the government had clarified in a statement that the tax was proposed only on the interest part of the EPF corpus.
But with today’s decision, the government has withdrawn the proposal completely.
Meanwhile Congress Vice President Rahul Gandhi who had requested the government to withdraw the proposed tax has taken credit for the rollback.
“I felt the middle class people were being hurt, so I decided to put some pressure on the government…happy that they’ve got some relief,” said Rahul.
(With inputs from PTI)