Low-wage earners face EPF tax blow

Union Budget 2016-17 holds another tax whammy for employees’ provident fund savings which will particularly hurt millions of low-income workers earning as little as Rs.5,000 a month.

Such employees would be taxed at the highest marginal income tax rate of 34.6 per cent if they withdraw EPF savings of Rs 50,000 or more, before completing five years of continuous service. The tax, officials said, is to be levied at the highest personal tax rate for those members who don’t have a PAN card, according to the Finance Ministry. For those with a PAN card, the tax is levied at 10.3 per cent.

“Those with a balance of just Rs.50,000 in their EPF account, after, say 59 months of service, are essentially low income workers who are not liable to pay tax to begin with. Yet they will be taxed at the rate applicable for those earning over a crore of rupees a year,” a senior labour ministry official said.

To put that in perspective, banks deduct income tax at 10.3 per cent on interest income of over Rs.10,000 earned from fixed deposits. In cases where a depositor hasn’t shared his PAN card details with the bank, such interest income is taxed at 20.6 per cent. Separately, a PAN number is mandatory for jewellery purchases over Rs. one lakh. Personal income is tax-free in the country for those earning about Rs.21,000 a month or Rs.2.5 lakh a year.

An EPF account is mandatory for all employees earning up to Rs.15,000 per month (raised recently from Rs.6,500 per month) in firms employing over 20 workers. As per the law, 24 per cent of an employee’s salary is contributed to EPFO as a social security net for old age – a part of that (8.33 per cent) is diverted to an employees’ pension scheme (EPS).

The annexure to Part B of Finance Minister Arun Jaitley’s Budget speech, which deals with direct tax proposals, sets a Rs.50,000 threshold for deducting tax at source on EPF savings withdrawn before five years of service under section 192A of the Income Tax Act. The limit was set at Rs.30,000 last year, when the TDS provision was first introduced.

“We have repeatedly told the finance ministry to review the Rs.30,000 ceiling and do away with this highest tax rate provision for those not having PAN cards. If savings beyond a threshold have to be taxed, they could be taxed at 10 per cent. But they have raised the threshold by a ridiculous amount and refused to accede our request to lower the effective tax rate,” the official said, adding that nearly 85 per cent of EPF members don’t have PAN cards.

According to The Hindu’s calculations, verified with tax and retirement savings experts, those earning around Rs.5,400 a month (or as little as Rs.65,000 a year) and covered by the EPFO would accumulate around Rs.50,000 in 59 months, even without factoring in the annual interest credits. This assumes 15.67 per cent of the salary is deposited into the EPF account, with the rest invested in the EPS.

Continuous service

The labour ministry official stressed that the government doesn’t guarantee five years of continuous service in a firm covered by the EPF Act and cannot penalise an employee if they are forced to change their employment from a large firm to a small firm, or lose their job before the five year cut-off period.

“This is a very regressive move and would not only lead to taxing those who are not part of the tax net or pushing them to get a PAN card though their income is well below the taxable limit, but also create a huge compliance and paperwork headache for employers as well as the EPFO, who would have to issue tax deduction certificates,” said Amit Gopal, senior vice president at India Life Capital, a firm that advises corporate India on retirement funds.

The government has defended its proposal to tax 60 per cent of EPF savings as a tool to push people into the pension habit and said that only high-income workers would be affected, while those earning upto Rs.15,000 a month won’t be taxed.

Senior officials in the labour ministry and EPFO have argued that those earning over Rs.1.8 lakh a month cannot be considered high-income workers.

“Why should someone who earns between Rs. 0.8 lakh and Rs.2.5 lakh a year, be required to pay tax on his savings at the time of retirement? Such members never claimed a tax deduction n her or his EPF contribution to begin with,” the official said, adding the same logic applies in the case of tax on premature withdrawals.

Read More

Govt. may penalise higher PF savings

Budget 2016-17 could penalise voluntary investments over Rs 1.5 lakh into Employees' PF and General PF accounts, in a bid to prod people into investing their savings in other alternatives such as the National Pension System.

While investments into tax-saving small saving schemes like the Public Provident Fund are restricted to Rs 1.5 lakh a year, it is possible for employees to top up their EPF and GPF contributions beyond that limit. Though such investments don't lower an individual’s taxable income beyond the Rs 1,50,000 allowed annually under Section 80 C of the Income Tax Act, the interest earned on them remains tax-free.

The GPF is offered to government employees, while EPF benefits are mandatory for all organisations with 20 or more employees earning upto Rs 15,000 a month. Those earning over the Rs 15,000 ceiling can contribute to EPF on a voluntary basis.

“The revenue department in the finance ministry is keen on introducing penalties of some sort on such investments this time,” said a top government official aware of the deliberations on the matter in the run up to the Union Budget. “One alternative being considered is to offer a lower interest rate on investments over Rs 1.5 lakh,” he said.

This is part of a fresh attempt by the finance ministry to change people’s investment preferences and nudge them towards the relatively new National Pension System (NPS) administered by the Pension Fund Regulatory and Development Authority (PFRDA).

The PFRDA currently has assets of Rs 1.10 lakh crore under its watch and reports to the finance ministry, while the Employees’ PF Organisation works under the labour ministry and has over Rs 10 lakh crore under its administrative control.

“The finance ministry is trying to promote the NPS and downgrade EPF. In the last Budget, it introduced an additional Rs 50,000 tax deduction for investments into NPS, after exhausting the Rs 1.5 lakh limit under section 80 C,” the official pointed out.

However, experts said that penalising people for investing more in EPF or GPF is not a good idea and it would be unfair to deprive an investor of the income that accrued on his investments. EPF savings are pooled and deployed in various instruments, including government debt.

“The returns on EPF savings involve no largesse from the government. They pay out what they earn on their portfolio,” said a senior EPF official who stressed that the EPFO’s trust has a fiduciary responsibility towards its members, as defined in the Indian Trusts Act.

“In last year’s Budget, the government said it will use Rs 6,000 crore of unclaimed deposits lying in EPF accounts to subsidize new social security schemes for senior citizens. This hasn’t been implemented, precisely because it is not legally tenable to forfeit an employee’s savings just because he hasn’t turned up to claim it,” the official pointed out.

Since 2011, the government stopped paying interest on EPF accounts that were idle for three years. The money parked in these accounts continues to earn income, but it hasn’t been used to raise the EPF rate payouts for other members owing to similar considerations about whether this would be legally permissible.

“This is not a good idea. In a country where pensions mean different things to different people, policy shouldn't play favourite between instruments of social security. The Government should not have an instrument bias, especially when asset allocation of these options is going through a period of convergence,” said Amit Gopal, senior vice president at India Life Capital.

A part of EPF savings are invested into the stock market since August 2015, just like the NPS has been offering to its investors. Mr Gopal said it would be imprudent and impractical to offer differential rates for EPF savings upto Rs 1.5 lakh and those beyond.

PFRDA chairman Hemant Contractor said that some of the growth in NPS accounts, which grew from 87 lakh in March 2015 to 1.15 crore by this month, could be attributed to this tax sop that takes the tax-deductible investments under NPS to Rs 2 lakh a year.

Mr Contractor also welcomed any move by the government to improve the tax treatment for NPS investments that are currently taxable at the time of retirement as opposed to EPF savings that are tax-free.

Read More

Union budget may boost take-home salaries

The Union Budget 2016-17 is likely to announce measures to put more money into the hands of employees with a monthly income up to a certain threshold, like Rs.10,000, for instance, by doing away with their mandatory 12 per cent contribution for Provident Fund (PF) savings, a government official said on condition of anonymity.

“We are in favor of waiving the employees’ contribution altogether up to a certain level of income. This will boost the take-home salary of such employees rather than force them to park so much of their monthly income into their EPF account for retirement,” said the official, who had participated in the deliberations of a Committee of Secretaries, set up by Prime Minister Narendra Modi, that has endorsed the idea.

Presently, 24 per cent of salaries of all employees in the formal sector earning up to Rs.15,000 a month, are deducted towards the employees’ PF account — with 12 per cent counted as employer’s share and 12 per cent as employee’s contribution.

Employers would continue to pay their 12 per cent share towards employees’ retirement savings account and other administrative charges, including those related to the employees’ deposit-linked insurance scheme that EPF account holders are automatically enrolled into. EPF contributions are mandatory for all firms employing twenty persons or more.

If the employees’ contribution is waived for those earning up to Rs.15,000 a month or Rs.1.8 lakh a year, the current ceiling for statutory EPF contributions, it would increase take home salaries for such employees by Rs.1,800 a month or Rs.21,600 a year. Officials said this would be the equivalent of a tax break to such beneficiaries as they are anyway not liable to pay any income tax. Personal income upto Rs.2.5 lakh a year is exempt from income tax.

While the government hopes this could spur domestic consumption and demand and play a part in reviving the investment cycle, it is also keen on doing away with the system of imposing high forced savings on low income workers through the statutory EPF contributions. The labour ministry as well as the Employees’ Provident Fund Organisation that administers the scheme have been consulted over the proposal and have concurred with it.

An analyst said this could also help arrest the trend of higher job creation in the informal sector and jobs of informal nature in the formal sector.

“In a formal sector job, if you earn Rs.15,000 a month, 44.3 per cent of your salary is deducted towards statutory benefits like EPF and employees’ State insurance. For someone earning Rs.55,000 a month, the same number is just 8 per cent,” said Rituparna Chakraborty, Senior Vice-President at Teamlease.

A lot of young entrants into the workforce prefer to opt for informal work contracts with no benefits in order to ensure that their take-home salaries remain high.

“Employers can’t raise their cost to company for employees, while the young workers starting their careers want more money in hand to take care of rent, commuting costs and daily meals. And once they start their career informally, it is difficult to change track,” said Ms. Chakraborty, adding that the reduction in statutory contributions for EPF would incentivise the creation of more formal jobs.

Read More