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Budget 2016: Why dipping into your pension schemes will be ‘taxing’

union budget Updated: Feb 29, 2016 18:17 IST
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People watch TV at a showroom in Mumbai as Union finance minister Arun Jaitley presents the budget 2016-17 in Parliament on Monday.(PTI)

Leading up to the budget, the worst fear of investors was that long term capital gains tax norms for equity and equity mutual fund investments would be tightened. Thankfully, that didn’t happen, and investment-related tax increases were kept limited to increased transaction tax on option premia in equity derivatives and a 10% dividend tax on people who get more than Rs 10 lakh as dividend. The former is of concern only to short-term traders while the latter is very much in the super-rich league.

Overall, Arun Jaitley’s third budget makes it clear that this government is going to stick to the path of incremental reforms. The budget is focused on all the problem areas of the economy, while sticking to the virtuous path of fiscal rectitude.

Read: Budget 2016: Jaitley shuns populism; focuses on investment, growth, jobs

One of the things that I consider must-do in every budget, but which wasn’t done in this one was a hike in the exemption and tax slab limits as well as the amount limits of the various tax exempt investments. For example, when the Section 80C limit remains at Rs 1.5 lakh, then adjusted for inflation, it effectively goes down. Moreover, this slippage is effectively worse for taxpayers in the lower slabs.

As far as savings and savings-related taxation goes, there’s a potentially huge change in this budget, one that has been in discussion for many years. The finance minister has brought the same taxation structure on all retirement savings products. This means that the National Pension System (NPS) is now finally at par with EPF as far as taxation at the time of retirement goes. However, he has done so not by making NPS withdrawals tax exempt (which was the demand) , but by making both partially taxable. Going forward, 40% of the withdrawals from each of these schemes will be taxable. The good thing is that the taxation of EPF is not retrospective. Tax will be due only on the corpus that grows from the contributions that are made from April 1 onwards. Previously accumulated corpus will not be taxed. Perhaps, there will be some protests against this. This means that even a low-income EPF member will hit the highest tax bracket in case of a bulk withdrawal of dues. With 40% of the corpus taxable at 30%, the effective tax rate will be 12% of the total. Of course, this will be reached only many years in the future. It would be good if there is some easy mechanism for EPF and NPS members to stagger their withdrawals so that they do not hit a higher tax bracket than necessary, but there is still time to work that out.

Read: Budget 2016 top takeaways: I-T slab unchanged; super-rich surcharge rises

On taxation, the big--yet unfulfilled--promise of this government is to make tax officials less ‘adversarial’. There are some promising moves this time--like making more of the interface digital rather than personal, but the success will depend on execution rather than intentions. What Mr Jaitley needs to break is the pattern of squeezing the squeezable rather than doing the hard work of chasing only the evaders. Will this change? I’m not yet sure.

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