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Reuters/Shailesh Andrade
Tax planning.
EXPLAINED

Why Arun Jaitely’s EPF tax rollback is a big relief for India’s salaried class

By Madhura Karnik

Finance minister Arun Jaitley today (March 08) rolled back a proposal to tax employee provident fund (EPF) withdrawals. And that’s some relief for the salaried in Asia’s third largest economy.

Jaitley said in the Lok Sabha that the government will now conduct a “comprehensive review” of the proposal. ”The main argument is that employees should have choice of where to invest, idea is to make people join pension scheme,” he said.

That’s an about-turn from his remarks in the Feb. 29 budget speech when Jaitley announced that withdrawals from EPF, a pension-like investment scheme, will be partly taxed for all contributions made after April 1, 2016. Currently, withdrawals are tax-free.

While, according to the budget proposal, up to 40% of the corpus could be withdrawn without paying taxes, pulling out the remaining 60% would be taxable if it wasn’t invested in an annuity scheme—an instrument that provides a steady source of income.

This proposal would have hurt the retirement plans of working class India. Typically, employees withdraw the EPF corpus after retirement and invest it in either land, or other return-generating instruments, Chitra Jayasimha, practice leader and lead actuary, retirement planning at Aon Hewitt, a consultancy, told Quartz. 

She explained how the changes proposed in the budget would have hit salaried professionals:

Let’s say a 25-year-old joins a company today with a basic salary of Rs16,000 per month. Assume every year his/her salary increases by 10% and he/she retires at 60. All these years the contribution to EPF is 12% throughout. So, including interest at the time of retirement, he/she will get around Rs3.58 crore in the current case. If the proposed changes are implemented, he/she would lose around 18% of this corpus at the time of retirement if they choose to withdraw it.

Moreover, there aren’t many avenues for investments in annuities in India. This is because the returns they generate are low, Jayasimha said. ”The (budget) proposal had a drawback because it takes away the choice from employees,” she said.