Dear Finance Minister,
Your budget this year is laudable for the balance it has struck. As a salaried individual, I am glad you have not touched the income-tax rates and income-tax slabs. However, it hurts when in the guise of making me believe that your intent was to help us move towards a pensioned society, you have actually created a situation where I am chronically worried about my future.
I don’t understand the wisdom of bringing the only social security instrument of some sort under the tax net, that too at the time of withdrawal, when the retiree most needs the money s/he has saved through the working years. By making only 40 per cent of EPF withdrawals tax-free, unlike the earlier 100 per cent, you have indicated the intent to tap into my pension. The big leap between the budget announcement and now (March 2) are different voices coming from the ministry and the revenue secretary over the treatment of taxation on the EPF. While there is a talk of rollback of this provision, you have indicated your intent to tax the retirement corpus.
The initial indication was that 60 per cent of EPF withdrawal will be taxed as income if it is not invested in an annuity offered by an insurance company. Likewise, the income by way of annuity will be taxed. Annuity is treated as income and taxed depending on your tax slab. There was a communication about this taxation being applicable only to money put into an EPF account from April 1, 2016, and the growth on this contribution. Whatever be the case, I am now insecure about my most vulnerable years ahead.
For most of us, until recently there was no choice when it came towards contribution to the PF until the NPS came into place. In your last budget, you provided us with an additional tax benefit of Rs 50,000 per year for investment in NPS. This tax benefit is available exclusively under Section 80CCD (1B) and was over and above the mandatory Rs 1.5 lakh one saves under Section 80C. Like me, many others were very attracted by this new way to save tax dedicatedly towards our retirement.
You will agree that the EPF and the NPS are completely different instruments, though both attempt at providing a self-funded retirement income. It is for this reason that the tax treatment on both these instruments varies at the time of withdrawal—the EPF being tax-free on withdrawal and the NPS being partially taxed, based on the allowed commutation. Yes, the drawback with the EPF has been the liquidity it offers the member, unlike the NPS which has a clear exit only when one retires.
Being a realist, I am assuming it’s inevitable that you will tax the retirement corpus. But to make the case for NPS, you will need to do away with the disparity on tax treatment between the NPS and the EPF. Maybe you forgot to add the PPF to the list. If you do so in the future, please bring tax parity to all financial instruments.
Typically, exit from different financial instruments attracts tax, based on the period of one’s holdings in them and on the gain from such savings and investments. There is a capital gains tax, based on the holding period and treated as long- or short-term capital gains. For instance, in case of equity investments, the long-term capital gain kicks in on redemption after one year’s holding period. In all other instruments, including real estate, the gain is taxed after adjusting for inflation—this element of taxation appears to have been completely ignored by your team when considering taxation on my PF contributions.
The belief that the taxpayer is reluctant to pay tax is pretty misplaced, and I would like to explain why it hurts immensely when such accusations are hurled at honest people. Other than the income tax that I pay, my contribution to the PF is so directed that it can be mostly invested in government securities, which means that it goes into infrastructure projects. So, you land up building roads, airports and other facilities, for which I also pay different cesses. I also pay a toll when I use these. While I am flattered to be the egg-laying goose, if you are going to tax me at a flat rate on my money, you are basically abandoning your citizen even before he considers retirement.
Yours sincerely,
Narayan Krishnamurthy, Editor, Outlook Money
