Thursday, March 3, 2016

[Editorial # 76] Provident fund reform needs more clarity : The Hindu

[Following editorial has been published in The Hindu on 3rd March 2016. Read through it and try to answer the questions that follow. Please do not copy and paste answers. The objective of this exercise is to get you in the groove of answer-writing. Try to write in your own words. Don't hesitate to write in a bulleted-format, if you are uncomfortable in writing in paragraph form.]

The Central government finds itself in the thick of a controversy over the Budget proposal to tax a part of the accumulated corpus in the Employees’ Provident Fund (EPF) upon withdrawal. Gauging the popular mood, the Opposition is seeking to corner the government on this issue. The proposal is seen to hurt particularly the salaried middle class, considered a core constituency of the BJP. “Pension schemes offer financial protection to senior citizens,” Finance Minister Arun Jaitley said in the Budget speech. “I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans.’’ He proposed tax exemption for withdrawal of up to 40 per cent of the corpus at the time of retirement in the case of the National Pension Scheme (NPS). In the case of superannuation funds and recognised provident funds, including the EPF, the same norm of 40 per cent of the corpus being tax-free would apply to contributions made after April 1, 2016. From a larger social security perspective, Mr. Jaitley’s intention to lay the groundwork for a “pensionised society” is laudable. In an ideal environment, there is a justifiable case for prescribing a level-tax treatment for similarly positioned pension plans. However, in the pursuit of a principled taxation policy, the government should have imposed a similar provision for its own employees’ retirement savings in the General Provident Fund. But as things stand, they will continue to get a tax-free lump sum for their sunset years from the GPF apart from a pension, albeit on a defined contribution basis through the NPS for those who joined service after 2004.

The government should have also tried to distinguish between a regular pension scheme and a provident fund (that also provides a pension). Why should it force EPF subscribers to get two pension cheques, which once credited to their account would form part of their taxable income? The point is, the reform needs to be carefully calibrated. Besides the tax benefits it fetches, EPF is often seen as a reliable tool to force-save for the future. It has been, in a way, playing a critical role in inculcating the habit of saving in a country with a very limited social security net. In a sense, individual contributions to EPF could also be construed as a way of enabling a corpus to meet critical lifetime event expenditures. In any case, the contribution of employees to the provident fund is not tax exempt beyond the annual ceiling of Rs.1.5 lakh. Therefore, the tax on withdrawal will be tantamount to double taxation. For, one would have paid tax at the time of contribution as well. If the intention is to prod people to plan for pension, the government would do well to invigorate the Employee Pension Scheme, which exists today as a component of the EPF. The limited annuity product option also does not help the cause of force-driving people into a pension system. The government appears to have put the cart before the horse in this instance.


1. What is Employees’ Provident Fund (EPF)? Who puts money in this fund? Who manages this fund?

2. What is the purpose of such funds? 

3. What is understood by the term "Social Security"? How does the government provide social security to its citizens? Explain with examples.

4. What is NPS? What is its purpose?

5. What is the current debate on the new provision of taxation on EPF as announced in the budget?

6. What are different types of pension schemes available in the market?

7. If Employee Provident Scheme is for salaried employees, what are the social security options for self-employed people?

8. What percentage of Indian population are under some social security net? How can it be improved?


  1. 5.What is the current debate on the new provision of taxation on EPF as announced in the budget?

    Ans. The Budget 2016 has proposed making 60% of employee contribution EPF corpus taxable for contributions after 1.4.2016. Till now withdrawal of EPF corpus after 5 years of continuous service was fully tax exempt. The new provisions indicates that if the EPF is not used for buying an annuity then 60% of that portion of the corpus which is built from the employee contributions made w.e.f 1.4.2016 would be taxable.

    This has been done to bring EPF on par with NPS where 40% of the withdrawals on maturity have been made tax free.

    As per the FM's speech: "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 after 1.4.2016."

    The explanatory memorandum explaining the provisions of the Finance Bill says: In order to bring greater parity in tax treatment of different types of pension plans, it is proposed to amend section 10 so as to provide that in respect of the contributions made on or after the 1stday of April, 2016 by an employee participating in a recognized provident fund and superannuation fund, up to 40 % of the accumulated balance attributable to such contributions on withdrawal shall be exempt from tax.
    Under the existing provisions, any payment from an approved superannuation fund made to an employee in lieu of or in commutation of an annuity on his retirement at or after a specified age or on his becoming incapacitated prior to such retirement is exempt from tax.

    It is proposed to amend the said provisions so as to provide that any payment in commutation of an annuity purchased out of contributions made on or after the 1stday of April, 2016, which exceeds forty per cent of the annuity.

  2. Directive Principle of State Policy in the Constitution provides that the State shall within the limits of its economic capacity make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old-age, sickness and disablement and undeserved want.
    Employees’ Provident Funds & Miscellaneous Provisions Act, 1952. The said Act was passed to fulfill this purpose.
    Employee Provident fund is only applicable to the salaried employees. It is a fund in which both the employer and the employee have to contribute certain amount of their salary in a periodic manner.
    Presently they need to contribute 12% of the basic salary for employee. And employer contributes 12% of "basic salary,dearness allowances and retaining allowance". This contribution of employer is bifurcated into two parts. Firstly to provident fund. Secondly to employees pension scheme. A sum equal to 8.3% or up to Rs.6500 is contributed to pension scheme. And 8.33% of Rs.6500 i.e., Rs.541 will go to pension fund.
    The Employees' Provident Fund Organisation is statutory body of the Government of India, which manages such fund. The apex decision making body is the Central Board of Trustees.

  3. It is a measure which is taken by the State to maintain individual or family income. This is done when some or all sources of income are disrupted, terminated or due to some circumstances heavy expenditures have incurred.
    Provided in our DPSPs
    1.Just and humane conditions of work.(Article 42)
    2.Public assistance in certain cases.(Article 41)
    Employees’ State Insurance Act, 1948 (ESI Act)
    Employees’ Provident Funds Act, 1952
    Workmen’s Compensation Act, 1923 (WC Act)
    Maternity Benefit Act, 1961 (M.B. Act)
    Payment of Gratuity Act, 1972 (P.G. Act)

  4. National Pension Scheme
    It is a voluntary defined contribution retirement savings scheme. The employee contribution is fixed at 10% and is also the same for the employer.
    Central and state government employees along with the Public sector employees mandatory contributing in NPS are restricted from availing any other form of pension scheme under the government.
    Minimum amount per contribution- RS.500
    Minimum number of contributions - 1 per year.
    Minimum annual contribution-Rs 6000.
    There is no limit in the maximum contribution.

  5. Swarnajayanti Gram Swarozgar Yojana (SGSY); The objective of the scheme is to bring the self-employed persons above the poverty line by providing them income-generating assets through bank credit and Government subsidy.
    Indira Awas Yojana (IAY): The Government is implementing Indira Awas Yojana (IAY) with the objective to provide dwelling units, free of cost, to the Scheduled Castes (SCs), Scheduled Tribes (STs), and freed bonded labourers, and also the non-SC/ST BPL families in rural areas.
    National Rural Health Mission (NRHM): The Government has recently launched National Rural Health Mission which seeks to provide effective health care to rural population including unorganized sector labourers.
    Janshree Bima Yojana (JBY): Janshree Bima Yojana (JBY) a group insurance scheme implemented by LIC is available to persons between age of 18 to 60 years and are living below or marginally above poverty line.