Arun Jaitley will probably go down in history as the finance minister who made retirement sound like a four-letter word. His proposal in the 2016-17 Budget that 60 per cent of an employee’s contribution made after 1 April 2016 to the Employees Provident Fund (EPF) would be taxed on withdrawal has evoked a sharp reaction. The EPF is not a grand investment option but in the absence of anything better it is the only recourse to 3.7 crore salaried class employees who hope to have some savings after retirement. Jaitley sought to defend himself and the government by saying that the bulk of EPF contributors would not be affected but it did not cut much ice with the salaried class. The finance minister’s argument that the tax was aimed not at earning revenue, but at bringing parity between the national pension scheme and EPF was feeble, at best. The irony of it all was that the government sought to tax the salaried class and offered tax offenders an amnesty. Where is the logic in this?
The EPF offers an 8 per cent rate of interest which ensures that the value of the money stays marginally ahead of the inflation rate, which means the purchasing power remains the same as at the time the contribution was made. This low rate is because a bulk of the money is invested in government securities which do not offer large gains. If at the time of withdrawal contributors are taxed then the value will drop further. The government loses nothing, but to the contributor who has invested his or her life savings in the EFP, this tax could have a debilitating effect.
It appears that what the finance minister wants to achieve is a diversion of funds from the EPF to the national pension scheme from where money can be more easily routed to the stock market. But the question that Jaitley should have asked is why has the NPS not drawn employee contribution? There obviously is something wrong with the NPS for employees to stay away and the finance minister should have addressed this problem instead of tinkering with the EPF. Now instead of having one faulty scheme (NPS), we have two.
The tax is also morally wrong because it takes away the freedom of the employee. The tax that Jaitley is seeking to impose is such that the only way to avoid it is by investing in an annuity plan which means the employee has no choice and the option of investing in immovable property like a house or an apartment has been taken away by the finance minister. Why should the government decide what an employee does with his retirement benefits? It is also morally wrong because it now skews the balance in favour of the stock market, where apart from a nominal 12 month lock-in period, the government is willing to completely exempt from tax an investment in equity.
India is not a developed nation where retirement benefits are substantial. Here, apart from government employees none receive pension or any sought of benefit after retirement. The government should rightly have formulated a scheme to encourage employees in the private sector to create pension funds of their own by exempting such schemes from any tax. Instead, it has done the opposite and by doing so it has become the first government to have retirement tax.
