Reddy Panel: 20% Tax On Returns From Long Savings Urged

The expert committee on small savings has recommended that all 'new' long-term savings to be taxed at a flat rate of 20 per cent at the time of withdrawals.

The proposed system will be in contrast with the current practice of taxing at the time of accruals. Any premature withdrawals, in the event of premature death of the beneficiary, is proposed be taxed at a flat rate of 10 per cent.

The major financial instruments forming part of long-term security in India are employees provident Fund (EPF), public provident fund (PPF), and public pension fund.

For the 'old' or already existing long-term schemes, the committee has recommended that all the fresh accretions has to be stopped and their withdrawals should not be taxed.

 

According to the committee, the tax incidence should be on total return, irrespective of whether it is from dividend or interest or capital gain.

The panel said that all investors would be given the option to convert their short and medium-term savings into long-term savings without any penalty within a period of say six months or at the most one year. Subsequently, old deposits would be treated similar to fresh deposits with regard to tax treatment. However, loan facility from the long-term savings may be allowed to the investors at a market related rate, it said.

Considering the social structure of the Indian economy and inadequate social safety provisions, the rate of income tax at the time of withdrawal may be kept lower than the rate at which the tax concession was conferred on contribution. Accordingly, all withdrawals at the time of maturity could be uniformly taxed at a rate of 10 per cent, it said.

In order to facilitate financial accumulations and also eliminate the misuse of premature withdrawals for the purpose of tax avoidance; all premature withdrawals, except in the case of death of the beneficiary, should be subjected to a uniform income tax at a rate of 20 per cent - the rate at which the tax concession was obtained at the time of making contribution in the long-term financial assets.