Review Employees' Provident Fund Tax Proposal, PM Tells Arun Jaitley: Sources

Written by Rahul Shrivastava | Last Updated: March 05, 2016 

Following criticism over the proposal, Finance Minister Arun Jaitley that any decision on a reversal would be taken by the Prime Minister. (File Photo)

New Delhi: Prime Minister Narendra Modi has asked Finance Minister Arun Jaitley to "explore ways to review" the new Budget proposal to tax Employees' Provident Fund or EPF withdrawals, sources have told NDTV.

In his budget, Mr Jaitley had proposed that after April 1, 2016, 60 per cent of the amount deposited in the EPF account of the employee will be taxable at the time of withdrawal, while 40 per cent will be tax free. Earlier, the entire EPF deposit was tax free at the time of withdrawal if the employee has completed five years of continuous service.

Following criticism from people affected, the opposition, trade unions and even RSS affiliates, the Finance Minister had at a meeting of NDA lawmakers last Tuesday explained the proposal and had said that any decision on a reversal would be taken by the Prime Minister.

Sources say the government may consider two options - first a proposal to tax only the returns on withdrawal and second a possible rollback of the provision. While taxing the interest on the withdrawal would need only a clarification of intent in Parliament, a rollback may need an amendment which may be moved when the Budget comes for discussion in the Lok Sabha.

As the opposition demanded a rollback, the government claimed that the EPF scheme was being used by the high salaried to evade taxes while it was originally meant for those in the non-government sector earning less than Rs.15,000 per month.

As per government estimates, a little over 30 lakh EPF subscribers were in the high salary net out of 3.8 crore EPF subscribers. The government later clarified that the scheme does not cover government employees covered under the Government Provident Fund till 2004 or the National Pension Scheme or the NPS. Finance Minister Jaitley had contended that the proposal was to bring all pension schemes at par.

The Finance Ministry had said in a statement earlier this week that the new rule will keep the Provident Fund corpus tax free if only 40 per cent is withdrawn outright at the time of retirement and 60 per cent is re-invested in an annuity or pension fund.