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Employees' Provident Fund: The Clarification of the Clarification of the Clarification...

Mar 3, 2016


There must be some way out of here" said the joker to the thief
"There's too much confusion", I can't get no relief
- Bob Dylan, All Along the Watchtower

Arun Jaitley presented his third budget on February 29, 2016. Since then, the only point from the budget that is being discussed is the income tax to be applicable on the Employees' Provident Fund and other recognised provident funds.

In fact, the government's communication on this left a lot to be desired. The finance minister Jaitley said during the course of the speech: "I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans. I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans. I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016."

Given that Jaitley gave a 100-minute-long speech, he could have taken a minute more and gone into the details of this change.

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Barely had he finished saying this, all hell broke loose on the social media. As soon as he had finished his speech, the television channels caught on to this point. Jaitley should have ideally provided an annexure to his speech explaining the exact details of the plan. But an annexure wasn't provided and neither did he go into the details. This created a lot of needless confusion.

What Jaitley basically said was that 40% of the accumulated corpus of the EPF and other recognised provident funds, on contributions made after April 1, 2016, would be tax free. As of now 100% of the accumulated corpus on the EPF is taxfree.

The first interpretation after Jaitley's speech was completed was that now up to 60% of the EPF corpus will be taxable. On the social media people are quick to draw conclusions without waiting toget into details. A reading of the Finance Bill made it clear that wasn't the case. If 60% of the corpus was used to buy annuities to generate a regular income, this amount would remain tax free as well.

The minister of state for finance Jayant Sinha clarified this on a television channel, late evening on February 29,2016. And then he made a mistake, which added to the confusion. He said income earned by buying an annuity would be tax free. Income earned from annuities is taxable.

Then he was asked if the corpus of the Public Provident Fund(PPF) would be taxed as well. He did not answer in the affirmative to this question, neither did he say no. The anchor asking the question essentially concluded that the accumulated corpus of the PPF would now be taxable.

After this, the revenue secretary Hasmuk Adhia, clarified that PPF would continue to be the way it was i.e. its corpus wouldn't be taxable. He also made another remark which again introduced more confusion into the entire debate going on. He said a tax would be levied only on accrued interest on 60% of EPF contribution, after April 1, 2016.

This was contradictory to what Jaitley had said in his speech. He had said that 40% of the corpus will be tax free, which essentially means that 60% of the corpus will be taxed.

It is rather sad to see that the top policymakers of a ministry trying to bring in a very important change on a point that impacts so many people, were not clear about basic things. Either they hadn't been briefed properly or they just didn't realise how huge is the change they were trying to bring in.

After all this hungama the ministry of finance put out a clarification. The clarification started with these lines: "There seems to be some amount of lack of understanding [the emphasis is mine] about the changes made in the General Budget 2016-17 in the tax treatment for recognised Provident Fund & NPS."

Rather ironically, the policy makers at the ministry of finance had contributed majorly to this lack of understanding. After this clarification (actually clarification of a clarification of a clarification if we were to start with Jaitley's speech, go to Sinha's comments and then Adhia's clarification) this is how things stand as of now.

As the ministry of finance's clarification points out: "The Government has announced that Forty Percent (40%) of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and National Pension Scheme."

Does this mean what it means? Not really. There are certain nuances to it. For employees within the statutory wage limit of Rs 15,000 per month, things would stay as they currently are i.e. their corpus would continue to be 100% tax free.

Further, if you are a private sector employee and you want 100% of your EPF money to be tax free you need to buy annuities. As the finance ministry's clarification points out: "It is expected that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% of the remaining Corpus is invested in Annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity."

What this means is that the private sector employees can make 100% of their EPF corpus accumulated on contributions made after April 1, 2016, tax free, by investing 60% of it in annuities. What about public sector employees? This is where things get interesting. The clarification is totally silent on this.

Hence, for public sector employees their provident fund continues to be 100% tax free at maturity. It means that public sector employees (or babulog) do not need to invest money in annuities at all. They can withdraw 100% of the money tax free. A private sector guy wanting to withdraw 100% money has to pay tax on 60% of the corpus he has accumulated on contributions made since April 1, 2016. Further, this is a clear attempt by the babus who drafted this change to ensure that their provident fund continues to remain 100% tax free.

Why is there this differentiation? Why is the private sector employee being treated in this unfair way? The press release further points out: "The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement."

Doesn't the government want public sector guys to do this? Shouldn't babulog also be buying annuities to generate a regular income from their provident fund corpus after retirement? The government hasn't offered an explanation for this but a possible explanation for this is that many retired government employees already get a pension from the government. Hence, their provident fund is 100% tax free.

This is bizarre. Many government employees get a fixed pension and on top of that get 100% tax free provident fund. A private sector employee on the other hand is forced to buy annuities. Why? The ministry of finance's clarification points out:

"There are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly - paid employees [italics are mine] of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this. What we are saying is that such employee can withdraw without tax liability provided he contributes 60% in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in Annuity product the tax would not be charged on 40%."

The term highly-paid is not defined. I have a problem with this approach. It assumes all government employees earn a lower salary than private sector employees. And that is incorrect. If the idea is to tax, why not have a cut off on the basis of the total amount of the corpus that has been accumulated rather than try to differentiate between public sector and private sector employees? That would be a much more equitable way of going about it.

Also, the question is, is this government worried about an equitable way of doing things at all? I don't really think so. The government plans to open a compliance window for those who have black money and are willing to declare it. Black money is income which has been earned but on which tax hasn't been paid.

This would involve a tax of 30%, a surcharge of 7.5% and a penalty of 15%. By paying 15% extra, those who have black money can ensure that "there will be no scrutiny or enquiry regarding income declared in these declarations under the Income Tax Act or the Wealth Tax Act," They will also have immunity from prosecution. What this means is that if you are willing to pay 15% extra, the law of the land will not apply to you.

Money can't possibly buy love, but it definitely can buy everything else. The Modi government just showed us that.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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12 Responses to "Employees' Provident Fund: The Clarification of the Clarification of the Clarification..."

Abdul Salam

Feb 19, 2017

kindly explain the term and condition or guideline for the employee of public sector undertaking or aided school,for the GPF/EPF account regarding

Like (1)

Sreedhar Krishna Murthy,

Mar 8, 2016

This article creates more confusion than clarifying like the Govt. interim clarification. WE DO NOT KNOW WHAT WAS THE SCOPE OF THE AMENDMENT AND TO WHOM IT APPLIES AND TO WHAT EXTENT. The fact whether it covers PUBLIC SECTOR employees is in doubt. Therefore, commenting adversely till one makes a research and gets clarification from the Govt. Now luckily Arun Jaitley FM has rolled back the proposal in the budget to tax the EPF. The debate would abate now. Any article on such sensitive issues should not prejudge and mislead the affected members and the public at large.

Like (1)


Mar 8, 2016

Mr. Vivek has wrongly messed up EPF and GPF. Public sector employees are covered under EPF and not GPF. GPF is meant for government employees and not Public Sector employees.

Like (1)

Shamim Akhter

Mar 3, 2016

Mr Kaul's understanding of PF for public sector employees & private sector employees is not correct. PF act is common for both which is contributory one. Only PF for Government employees are different which is known as GPF and they get pension from Government. Public sector employees are not government employees( referred Babulog) and they are not entitled to any pension from government.

Like (2)


Mar 3, 2016


Like (1)


Mar 3, 2016

Dear Vivek,why should anyone be forced to use his life savings as the govt desires?it seems salaried class can only be taken for a ride by any government,and another point is almost 5crore employees come under this scheme, see the quantum of fund the governmemt can withhold in the pretext of a welfare measure, and if the employee dies say for example after 20 yrs the money will be returned to family without any additions, and how much its value might have depreciated by then,say for example each employee is forced to hokd back 5 lakhs in annuity scheme,calculate the VOLUME OF FUND GENERATED BY GOVT,and they declare this as concern for the citizen,let the government if so much worried about their citizens welfare stop Contributary pension scheme,revert to pension for all and prove that they really are for citizens welfare,control price rise,curtail welfare measures to TATA/AMBANI/RELIANCE ETC,no govt so far has resorted such worst tactics,CITIZENS SHOULD FEEL THEIR ELECTED REPRESENTSTIVES ARE THERE FOR THEM, BUT NOW THE SITUATION IS BECOMING SO SCARY, THAT INSECURITY FEELING HAS CREEPED IN EVERY CITIZENS MIND,WETHER INDIANS WILL HAVE TO FORGET THE WORD WELFARE UNDER THIS GOVT.AND IT SEEMS CITIZENS ARE FOR THE WELFARE OF THE GOVT AND VESTED INTERESTS,NO IDEA WHERE ORDINARY CITIZENS WILL LAND UP BY THE TIME THIS GOVT FINISHES ITS TENURE,STARTING FROM LABOUR LAWS THINGS ARE TURNING GLOOMY DAY IN AND DAY OUT.WHERE ARE WE CITIZENS DRIVEN TO?IS IT ROSY???? OR SUICIDE FOR EVERY CITIZEN?ONLY TIME WILL TELL!!!!

Like (1)

JR Kumar

Mar 3, 2016

Again another well written piece.I feel that certain percentage of EPF final amount due for both Govt and public sector should go into annuities to ensure fixed monthly income, since the idea of fixed income inlieu of pension for private sector employees is good. But the final amount due may be less if non repayable loans are taken out during employment.

Like (1)


Mar 3, 2016

Last time BJP came to power Arun Shourie was selling PSUs to Private Parties. This time Arun Jaitley is selling EPFO savings of service class to private parties managing annuities. Mr Jaitley is acting as Insurance Agent for Multinational Insurance Companies, he has already increased FDI in Insurance sector. Mr jayant Sinha is his accomplice in this act. Mr Modi is also involved as he must have given a go ahead for this idea. Mr Hasmukh Aadhia is merely a servant echoing thoughts of his Masters like a parrot.
BJP has proved themselves to be a service class adverse government both times it has come to power. Please dont vote for BJP and please ensure your family and kin ( children, their families and their relatives ) also dont vote for this anti service class / anti middle class party.

Like (1)

Satya Srinivas

Mar 3, 2016

As per NPS withdrawal process, subscriber should buy atleast 40% as annuity. That means remaining 60% can be taken as lumpsum and we are expecting this 60% to be tax free. As per budget change, even NPS was not given fair deal (which Fin Minister is recommending) . You need to buy the annuity for 60% instead of 40% to save tax, i.e., 20% more than required.
This is a ill researched, botched up change.

Like (1)


Mar 3, 2016

I fully agree. Perhaps the Babulog, cleverly excluded themselves and expected that the country would be silent and accept the taxation of EPF of the Private Sector which would boost the Govt revenues, for which they were supposed to give suggestions, which they obviously did. As it is the Government and PSU employees enjoy a host of privileges compared to the Private sector - like 100% exemption from Gratuity irrespective of the amount, 100% exemption on Leave Encashment and the 100% EPF maturity value. If the Govt is honest enough to bring everything on par, then they should include all these perks to the Government & PSU employees also under the same bracket as the Private Sector employees. In any case taxation system of contribution and interest accrued on them till date and till maturity as this would be betreyal of trust. The Govt can think of taxing the contribution from 01/04/2016 and the interest on these contribution affter 01/04/2016 as they may deem fit - which obviously would make EPF very unpolpular and the Govt could loose fair amount of funds from these. I wonder the logic behind all these especially when the country's savings ratio w r t GDP has reduced by nearly 25% ( from 39% to 30% ) over the last decade, making India vulnerable to external financial crisis, unlike in the past.


Like (1)
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