[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?