Finance Minister Arun Jaitley may have been forced to back down on taxing Employees' Provident Fund (EPF) withdrawals a week after introducing the measure in the Budget, but the government has not given up on the goal of creating a pensioned society.
It's now considering a proposal to make it mandatory for employers to route most of their share toward the retirement savings of employees into the Employee Pension Scheme (EPS) rather than EPF for employees above the salary threshold of Rs 15,000 per month, an official said. Aprivate sector employer matches contributions made by an employee to EPF - 12% of basic salary by each. While all of the employee's contribution goes to EPF, 8.33% of the employer's payment goes to EPS subject to a maximum of Rs 1,250 a month.
That's 8.33% of Rs 15,000, the statutory limit for contributions. These and other EPS conditions may change if the proposal is implemented wherein those earning more than Rs 15,000 a month will see a higher share of the employer's contribution going to EPS.
Changing the rule on the employer's contribution would mean that a substantial portion of this would go toward a pension for the employee, rather than getting withdrawn at one shot from the EPF at retirement. This will maintain parity between EPF and the General Provident Fund as the former will continue to enjoy exempt-exempt-exempt (EEE) status at the stages of investment, accumulation and payout. "This proposal was discussed at a highlevel meeting in the PMO last week," said the senior government official cited above. He was one of those who attended the meeting.
There was near agreement that this would be a better way to move toward a pensioned society, according to the official, who did not wish to be identified. "Government does not want to go wrong this time and we would ensure that there are extensive consultation with all stakeholders on the proposal," the official added.
On Tuesday, Jaitley scrapped his Budget proposal to tax EPF withdrawals unless the subscriber bought an annuity, saying that the government wanted to undertake a comprehensive review. This followed a backlash against the move from those who would be affected despite the government explaining that it wanted to discourage people from taking out all their money in one shot and ensure that they had a steady income over the remainder of their lives.
The EPS proposal was welcomed by tax experts.
"Making employers contribute to EPS is a more sensible decision that will help the government (succeed in) its objective of creating a pensioned society," said PwC personal tax leader Kuldeep Kumar. Kumar is of the view that the government should restore an EPS feature that was discontinued two years ago and change the provisions of the scheme so that defined benefits are given only to those in the low-income segment.
The government used to contribute 1.16% to the pension kitty of every EPF member as part of EPS run by the EPFO to offer a pension for life after the age of 58. In September 2014, EPFO withdrew this subsidy for those earning above the threshold of Rs 15,000 per month.