In his last two budgets, Finance Minister Arun Jaitley has not given anything to the middle class. The income tax slabs have also not been reduced, owing to the lack of revenue generation.
But now, the government has made a decision that will make salaried persons sweat. When you withdraw your deposits made under the Employees' Provident Fund (EPF) and National Pension System (NPS) schemes, the interest earned on 60% of the deposits will now be taxed.
In his budget speech on 29 February, Jaitley said that 40% of the total corpus withdrawn at the time of retirement will be tax exempt. This means that the remaining would be taxable, unless the amount is invested in an annuity product like pension funds.
But even if the government is taxing only the interest on 60% of the corpus, the question is, why should people save money throughout their lives only to be taxed in the end?
Employers are required to contribute 12% of basic wages towards an employee's pension, or PF account, under the social security schemes run by the EPF Organisation.
Interestingly, while on one hand, the government is taxing the middle class, it has also given relief to start-up companies. It has offered to pay 8.33% of their contribution (for three years) when new employees enroll in EPF.
Also, unlike in the past, if an employer pays over Rs 1.5 lakh towards a worker's EPF account in a year, the government has decided to tax that too. There was no limit in the past.
In a clarification released on Tuesday, the government has said the following things:
The CPI(M)'s Rajya Sabha MP, Tapan Sen, has criticised the move.
"The government has no right to tax the lifelong savings of an individual, which have been accumulated through hardships. People can spend that money at the time of earning. But they save it only for their retirement, when they have to face many family responsibilities. Why should the government come and tell the person - 'invest that money in NPS or be taxed'?" he said.
Trade unions are also up in arms against the decision. As many as 11 central trade unions plan to go on a nationwide strike on 10 March to protest against it.
According Gurudas Dasgupta, general secretary, All India Trade Union Congress: "You are forcing people not to save in your attempt to bring in parity with the NPS (National Pension Scheme)."
A major reason for the fall in India's growth rate has been attributed to the falling household savings rate as a ratio to the GDP.
According to R Nagaraj, professor at the Indira Gandhi Institute of Development Research (IGIDR), in order to achieve a 10% growth rate with modest and stable inflation, India needs to step up its domestic savings rate, which has now declined to 29-30% of the GDP from 33-34% of the GDP during the boom last decade.
By taxing the EPF savings, the government is risking India's household savings rate. Does it make sense to just promote a financial instrument like NPS? The ball is now in the people's court - only they can decide if they want to continue investing in the EPF, despite the taxation.
Edited by Shreyas Sharma
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