How EPF discriminates against those who need it the most – Times of India

How EPF discriminates against those who need it the most – Times of India
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NEW DELHI: For a vast number of the salaried, the employee provident fund (EPF) is the only social security net they have. But the EPF rules are such that they tend to discriminate against the young and vulnerable — those who have not yet worked for five years without a break. It took a pandemic to expose how this hurts the private-sector salaried workers most when they have already been hit hard by job loss.

How EPF withdrawals are taxed

Withdrawal of EPF accumulated balance is not taxable if:

, How EPF discriminates against those who need it the most – Times of India,

Union Budget 2021: The case for a higher standard deduction

In July 2019, finance minister Nirmala Sitharaman presented her maiden budget in which she hiked the standard deduction for salaried employees to Rs 50K from Rs 40K. The standard deduction is taken out from salaried taxable income, thus reducing the taxable income. To put more money in the hands of the taxpayer, a substantial increase in the standard deduction makes sense.

An employee participating in EPF has rendered continuous service for five or more years;

Or, if before 5 years, the employee’s service has been discontinued on grounds of ill-health, or by contraction or discontinuance of employer’s business or other causes beyond the control of the employee.

In other circumstances, the accumulated balance withdrawn within five years of continuous service is considered as taxable income.

During the Covid-19 pandemic, many employees lost their jobs due to business uncertainties. The following illustration brings out the taxability of EPF withdrawal in different cases/ circumstances (all figures in Rs): As Rohan’s employment was terminated by his employer, the EPF balance withdrawn by him will be exempted from tax.

, How EPF discriminates against those who need it the most – Times of India,

As Rashi voluntarily resigned from employment after working for 2 years, her EPF balance withdrawn would be taxable. For withdrawals in excess of Rs 50,000, tax is usually deducted at source. Roshni, who did not withdraw the EPF amount, can map the accumulated balance to the new employer, in case she continues with EPF. Rahul rendered continuous service of more than five years, so his accumulated EPF would not be taxable. However, the interest that has accrued for the period of two years after cessation of employment would be taxable in his hands.

EPF advance during pandemic

The government has allowed members of the EPF scheme to claim ‘nonrefundable advance’ from their EPF account to the extent of the basic wages and dearness allowance for three months, or up to 75% of the amount outstanding in the EPF account, whichever is less. This has been a very effective scheme and a timely intervention to address liquidity issues faced by employees during the pandemic. The FAQs released by provident fund authorities have clarified that such withdrawals will not be taxable. However, the corresponding amendment in the Income Tax Act to ensure that the non-refundable advance received is not taxable is still awaited.

New, or old: Which tax regime makes the most sense for you?

A salaried taxpayer’s expectations are high from his year’s Union Budget. Last year’s Budget introduced the new concessional tax regime that offers an individual the option to choose lower tax rates in lieu of forgoing certain tax exemptions and deductions. The new regime prescribes tax rates ranging from 5% to 30% with the highest tax rate applicable for income above Rs 15 lakh.

Exemption desirable for social security withdrawals

As compared to developed countries, India does not have a strong social security net to protect workers in the event of unemployment. Globally, many countries provide unemployment insurance to employees upon satisfaction of specified conditions. For instance, in the US, those who are unemployed due to no fault of their own are eligible to claim unemployment insurance. In Canada, employment insurance provides benefits to individuals who have lost their jobs and are available for work but cannot find a job. No such social security support is available in India. And, taxation of EPF withdrawals would leave a lower amount in the hands of employees in times of need.

For taxing EPF withdrawals, the limit of five years may be retained. However, exemption from tax may be considered if withdrawals are made before five years to meet certain contingencies/life goals such as purchase of residential house, marriage, education of children, medical expenses/ emergency, pandemics such as Covid-19 etc.

Budget 2021: Why finance minister should not bring in any new tax

Finance minister Nirmala Sitharaman faces a huge challenge this year. The govt’s revenues are down but expenditure commitments are up. In the circumstances, any additional burden on existing taxpayers or any new taxes like wealth tax/estate duty,which were discontinued earlier, may not be in sync. The mantra for the FM in Budget 2021 should be ‘No New Tax’.

The government is in the process of implementing the new Labour Codes, likely to be effective from April 1, 2021. One of the important aspects of the code is to provide ‘social security for all’. In keeping with this spirit, there is a need to amend the tax laws also, to no longer subject EPF withdrawals to tax.

– By Rama Karmakar

The writer is Tax Partner at EY India. Ankur Agrawal, senior tax professional with EY, also contributed to this article (Views expressed are personal)

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