Finance Minister Arun Jaitley may have inadvertently stepped on a landmine with his proposal to tax retirement savings in the Employees’ Provident Fund (EPF) at the time of withdrawal. He’s earned the wrath of the middle-class with his double whammy. Not only has he overlooked the segment completely in the matter of income tax concessions but, worse, is also taking away a part of the nest egg that almost all salaried middle-class people squirrel away in the EPF.
The tax will be applied only on the corpus (consisting of employee’s contribution plus employer’s plus interest accrued) that will be created after April 1. If one assumes the median age of employees as around 40 years, the tax charge on the retirement savings will be significant.
Apart from alienating a key constituency for the BJP, Jaitley may have also done a disservice to boosting financial savings in the country. People even now prefer physical assets such as gold and real estate for the higher returns that they offer. The new tax idea will only push them more towards physical savings leading to two collateral problems. One is pressure on the current account deficit if people shift to gold. And two, it will impact domestic capital formation adversely. Employees are now likely to contribute only the statutory minimum to the EPF.
The FM should also remember that in a country with poor social security, the EPF is an excellent retirement savings scheme. If it has been kept tax-free all these years, it is not without reason. If the idea was to level the field with the National Pension System it could have been done by bringing it on a par with EPF; in other words, it could also have been given the EEE status (exempting contributions, interest income and withdrawals).The Centre is defending itself saying that the move is to ensure people have old age security through annuities, which is not taxed. But people use their retirement kitty to either fund higher studies or marriage of their children or simply buy a roof over their heads. It is not for the government to tell them what is good or bad. The EPF taxation idea will hit middle-class retirees, cause a shift of savings to physical assets and ultimately, not benefit the NPS either.