Proposed tax on provident fund withdrawals rolled back

After widespread resentment, Finance Minister Arun Jaitley on Tuesday withdrew his budget proposal to tax 60 percent of provident fund withdrawals made after April 1 this year if they are not re-invested in annuity funds that fetch steady streams of income.

In a statement in the Lok Sabha, he also withdrew his budget plan to limit monetary contributions made by an employer in a recognised provident or a superannuating fund to Rs.150,000 per annum to avail tax sops.

However, the 40 percent tax exemption limit on the national pension scheme stays, Jaitley said.

The move is likely to benefit, among others, nearly 45 lakh members of the employees' provident fund (EPF) scheme earning over Rs.15,000 per month. The 3.26 crore remaining members of the scheme earning less than Rs.15,000 per month had not been targeted by Jaitley's original proposal.

The decision was purportedly taken at the behest of Prime Minister Narendra Modi.

"The purpose of the proposed reform in tax regime was to encourage more number of private employees to go for pension security after their retirement instead of withdrawing their entire money from their provident fund account," he said.

Accordingly, Jaitley added, 40 percent of the corpus withdrawn at the time of retirement was to be tax exempt, expecting employees of private companies to place the remaining 60 percent on annuity to get regular pension.

But if that was not done, then 60 percent of withdrawn corpus was to be taxed.

"A number of representations were received from various sections of the society, including members of parliament, suggesting this change will force people to invest in annuity products even if they are not willing to do so," he said.

"In view of the representations received, the government would like to do a comprehensive review of this proposal," and, therefore, I withdraw the proposal in paragraph 138 and 139 of my budget speech," he said.

"In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40 percent of corpus to be tax free will apply in respect of corpus created out of contributions made after April 1, 2016."

In Para 138, Jaitley had said: "In the case of superannuation funds and recognised provident funds, including EPF, the same norm of 40 percent of corpus to be tax free will apply in respect of corpus created out of contributions made after April 1, 2016."

Para 139 said: "Further, the annuity fund which goes to the legal heir after the death of pensioner will not be taxable in all three cases. Also, we are proposing a monetary limit for contribution of employer in recognized provident and superannuation Fund of Rs.1.5 lakh per annum for taking tax benefit."

Employees' provident fund is a popular social security for the salaried class that is maintained by a statutory authority. Any company with over 20 employees has to register for this fund.

The national pension scheme is a voluntary scheme for people aged between 18 and 60 years.

While the provident fund is a fixed return scheme with interest rate set by the organisation, the pension scheme has variable returns as up to 50 percent of your money can also be invested in stock markets.