Jaitley’s proposal to tax EPF is wrong, morally and in principle
The proposed tax will simply add it to the savers’ income. EPF returns are barely above inflation rates. To disallow indexation for inflation is grave injustice. This is wrong, morally and in principle.Updated: Mar 02, 2016, 08:17 IST
Despite alarm, the finance minister seems to be sticking to the plan of taxing part of EPF withdrawals. The government has issued a clarification on how this tax will work:
1) Only 40% of EPF withdrawals are tax free, unlike 100% earlier
2) 60% of EPF withdrawal will be taxed as income if it is not invested in an annuity offered by an insurance company. The subsequent income stream from the annuity will be taxed.
3) This taxation will apply only to money put into an EPF account from April 1, and the growth of that amount. Amount accumulated so far, and its further accumulation, will not be taxed.
According to the official explanation, “The purpose of this reform … is to encourage more private sector employees to go for pension security after retirement instead of withdrawing the money”.
This is not applicable to those earning less than Rs 15,000 a month, presumably because the government thinks it’s OK for low-earners to squander their PF after retirement.
The government has decided that the only way to do so is to make people buy an annuity, or face the threat of confiscation of a good part of their savings in the form of tax. This is a strange attitude. This despite the fact that annuities available in India are a very poor deal.
Annuity income is fully taxable, and the internal returns are around 6-7% pre tax.
Another problem is that this tax will treat the accumulation of savings as income. When you encash your holdings from any long-term capital assets like mutual funds and real estate, then the principal amount is not taxed, and the gains are treated as capital gains.
Long-term capital gains are either not taxed if held for a certain period (one year for equity and equity funds) or taxed after adjusting for inflation (for everything else). However, the proposed tax will simply add it to the savers’ income. EPF returns are barely above inflation rates. To disallow indexation for inflation is grave injustice. This is wrong, morally and in principle.
Moreover, because this tax will be on bulk withdrawals, it will push even low-income savers into the 30 tax bracket for that year. This is unconscionable. EPF savers are angry, and rightly so.
(Dhirendra Kumar is the CEO of Value Research. The views expressed are personal)