EPF Tax May Return in a New Avatar and it Won’t be Called a Tax

EPF tax proposed by the Budget has been rolled back, but the issue is definitely not over yet.

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The EPF tax may return in a new package and it probably won’t be called a tax. (Photo: iStockphoto)

It’s only been days since finance minister Arun Jaitley announced the rollback of the proposed tax on withdrawals from the Employees’ Provident Fund (EPF). But looks like the EPF tax may return – this time, in a new avatar, reports Livemint.

In fact, it may not even be called a tax.

The Centre is mulling levying the EPF tax on people who earn higher salaries, according to government officials quoted by Livemint. After the controversy from last time, the government is ready with a “well-deliberated, well-planned, and the government ready with a plan to effectively mitigate any backlash”, they added.

The government is trying to achieve parity between the EPF and the National Pension Scheme (NPS), as the finance minister himself had reiterated earlier.

This is How it May Work

Currently, an employee pays 12 percent of his/her basic salary towards EPF while the employer makes an equal contribution.

For those who earn less than Rs 15,000 a month, around 30 percent (3.67 percent of the 12 percent) of the employer’s contribution, goes to the EPF and the rest (8.33 percent) goes to the employees’ pension scheme (EPS).

The government may now suggest that the same apply to people who earn Rs 1-2 lakh per month.

Currently, the employee’s contribution of 12 percent is taxable beyond Rs 1.5 lakh a year but the employer’s contribution is entirely tax-free.

So, someone who earns Rs 1 crore a year (cost-to-company) ends up getting Rs 12 lakh of this pay tax-free.

These people may now be asked to opt for having 8.33 percent of the employer’s contribution go to the EPS and 3.67 percent to the EPF. In addition, 12 percent of their basic pay will go to the EPF as their own contribution.

This means that a little over a third of the total contribution (8.33 of 24) will go to the pension scheme.

If they don’t opt for this, the 8.33 percent will be taxed. If they do, then pension earnings are taxable at the rate of individual tax slab. In both cases, the government gets more tax than it does now out of them.

Read the full Livemint report here.

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