New Delhi, Sept. 20: The government wants to soon bring amendments to the Income Tax Act as well as provident fund laws to make withdrawals taxable.
The amendment is likely to be prospective in effect.
The finance ministry had announced its intention to move most tax-free savings towards the exempt, exempt, tax system when the budget was placed and set up a five-member committee to study the proposal soon after.
Top officials said the ministry has now decided it will move amendments to the PF act to make withdrawals from the fund taxable at the lowest rate of income tax.
However, keeping in view political sensitivities, the government wants only new PF accounts and fresh investments in PF to be taxable on withdrawal. Older investments, made before the law is passed, will remain exempt from tax.
Currently, the PF account is exempt from tax at all stages ' from investment to accrual of interest to withdrawal.
Sources said a section of the finance ministry had argued that even existing savings could be tapped by imposing a tax on premature withdrawals.
But other ministries which have been consulted have disfavoured this, pointing out that with huge numbers of people leaving jobs and hence being forced to withdraw PF savings to make ends meet, this measure would be extremely unpopular.
The change will affect not only the government provident fund, but also employees’ provident fund, EPF for short, and private provident funds.
Strident criticism of the amendment and opposition can be expected, especially as the government is also considering reducing the interest paid on EPF from 9.5 to 8.5 per cent.
After immense pressure from Left allies, the government had agreed to pay 9.5 per cent interest in 2004-05, though this meant paying more than what the fund was earning. It is unlikely to agree to continue to pay 9.5 per cent.
For the government and the giant fund, the problem is that the finance ministry had cut its own interest burden by slashing the return on its special deposit scheme, in which about 80 per cent of the EPF money is invested. Interest on the scheme was set at 8 per cent, far lower than the interest paid from EPF.
The remaining 20 per cent of EPF is invested in other government and state-run corporation bonds and instruments which fetch a higher rate of interest.
The current average yield on EPF investments is estimated at 9 per cent, with public sector securities yielding the highest return. But these securities too are trying to cut rates of return.
Taking into account administrative and overhead costs, all this makes it untenable to pay more than 8.5-8.75 per cent.