5 Reasons Modi Govt must Not have Taxed PFs, Pension Schemes

In the Union budget 2016, there’s a Heading named ‘MOVING TOWARDS A PENSIONED SOCIETY’. The heading is misleading. Why? As it’s more about imposing tax on  superannuation funds (Pension Funds) and recognized provident funds, including EPF, than moving towards pensioned society.

Why I think so? For some reasons. But before that this is how the Union Budget 2016 claims to be doing the good to the society.

  • Withdrawal up to 40% of the corpus at the time of retirement to be tax exempt in the case of National Pension Scheme (NPS). Annuity fund which goes to legal heir will not be taxable.

  • 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 on or from 1.4.2016.

  • Limit for contribution of employer in recognized Provident and Superannuation Fund of ` 1.5 lakh per annum for taking tax benefit. Exemption from service tax for Annuity services provided by NPS and Services provided by EPFO to employees.

  • Reduce service tax on Single premium Annuity (Insurance) Policies from 3.5% to 1.4% of the premium paid in certain cases.

3 Reasons why Modi Govt must Not have Taxed PFs, Pension Schemes

    1. When a person starts investing in a superannuation Fund or Provident Fund, he/she does so to save money for the time he will no longer be employable due to old age, health etc. He also saves money for the time his expenditures will not be met by the salary alone, for eg. education, marriage etc. When the Govt. taxes the corpus so made, then its action can be seen as : First you tax the Individual’s income and then when he needs his savings, you tax his savings. This is not good. He’s taxed twice. How… Keep reading.
    2. If the money saved in PFs and other retirement schemes remains with the Govt. for the next 20 – 30 years, then it must be thankful to those who do such savings. After all the Govt. has freedom to use the money corpus made as per its liking. It can use it to give incentives to businesses or spend as social spending. The move of taxing such savings at maturation or withdrawal is simply NOT acceptable.
    3. If PFs and other retirement schemes are meant for saving Individual Tax, then the act of taxing on maturity or withdrawal is simply — “NOT Honouring One’s (Government) Promise”. See it this way. Taxing such corpus means: First you diligently put money to such PF and retirement schemes every year; to save tax; and then the Govt. taxes you when you take back that money after 30 years. This is like the Govt. saying: You invest in such schemes to save Tax; and then pay tax which you saved all these years.
    4. It will not be wrong to say that the Govt. is eyeing the money of the employee, as the Limit for contribution of employer in recognized Provident and Superannuation Fund for taking tax benefit, has been capped to Rs. 1.5 lakh per annum . What does this mean. This means that although the Govt. wants you (the employee) to save as much as you want (I think to the limit of Rs 1.5 crore) ; it’s saving the employer, by capping his contribution to Rs 1.5 Lakh. Thus in the case of Contributory PFs, no matter how much the employee contributes, the employer will stop at just Rs 1.5 Lakh.
    5. Finally, lets discuss the idea of ‘MOVING TOWARDS A PENSIONED SOCIETY’.

What is the right way to create funds to be distributed as pension to those who don’t have any means of livelihood? The fund specifically created by the Government for that end.

Taxing employees to create such fund is not good. If the choice has to be made between an employer and an employee, then the burden of creating such fund must rest on the employer. As he’s the one who in any case can contribute more. That apart, since an employer is creating wealth, hence he is better positioned to contribute. We can understand it this way. If an employer pays a person Rs 30,000 per month, it doesn’t mean he’s paying him by incurring a loss. It means that the employer is at least getting Rs. 30,000 utility that person. Not to mention, in all likelihood an employer derives much more utility out of an employee. This explains why it’s not unreasonable to make an employer contribute the same money as the employee’s contribution.

The fact that the Corporate and the Businesses don’t want the Govt. to spend any money on Social Welfare schemes, doesn’t mean the Govt. secretly shifting the burden on the salaried class.

The social sector spending is very necessary; the Business should show more willingness to contribute towards it.

I think the more apt Heading would have been : ‘MOVING TOWARDS A Taxed PENSION, PF’.

I still think, the Midi Govt’s decision to tax 60 percent of the corpus of superannuation funds and recognized provident funds, including EPF, is WRONG.