Controversy over tax on EPF gets murkier

The excluded employees would primarily be the ones drawing statutory wages of up to Rs 15,000 per month.

The government will notify categories of employees who will be excluded from the controversial tax proposal on provident fund withdrawals, a Finance Ministry official said on Friday.

Finance Minister Arun Jaitley has in his Budget for 2016-17 proposed taxing 60 per cent of withdrawals from the Employee Provident Fund (EPF) on contributions to be made after April 1, unless the sum is reinvested in pension product such as an annuity.

"We have put an excluded employees category in the Finance Bill 2016. The government will notify the excluded category of employees to whom this new regime will not apply," the official said.

The excluded employees would primarily be the ones drawing statutory wages of up to Rs 15,000 per month.

Following a backlash from employees union and political parties, Jaitley has already signalled willingness to reconsider the proposal.

"There has been some reaction. When the debate comes up in Parliament, I will give the government's response as to what decision we finally take," he said earlier this week.

On table is partially waiving the proposed tax by levying it only on the interest accrued and not on the principal. There are also suggestions for complete rollback.

The EPFO has about 3.7 crore members of which about 3 crore members are those in the earning category of Rs 15,000 and below (statutory wages).

Explaining the rationale behind the Budget proposal, Economic Affairs Secretary Shaktikanta Das said the EPF has been exempt at all three stages -- contribution, interest and withdrawal-- and was originally meant for employees whose salaries are Rs 15,000 or below per month.

But over the years the benefit has been also utilised by people who are in much higher income brackets, Das said.

"There was an intention of the government to see that the third leg of the Exempt-Exempt-Exempt benefit also should go to target group. You will hear something from Finance Minister on this very quickly," he said.

Das said after the launch of EPF, the government also came out with another pension scheme NPS, which is Exempt Exempt Tax, irrespective of income bracket. "So there was need for parity (between EPF and NPS)".