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EET is imposed on tax-free savings when they are finally withdrawn

Defined or fixed contributory pension scheme for civil servants who have joined from 2004 and national savings certificates come within its ambit

Other tax-free savings instruments will be brought under this scheme

Only new tax-saving schemes likely to be placed under EET

Pension fund regulators want EET to be waived from new pension schemes

New Delhi, Dec. 31: The Union government is committed to exempt, exempt, tax (EET), but the upcoming polls may prompt it to opt for a half-way house. The Congress will fight Assembly elections in four states, including Uttar Pradesh, in 2007.

EET is imposed on tax-free savings when they are finally withdrawn. This has so far been imposed on a defined or fixed contributory pension scheme for civil servants who have joined services from 2004 and on national savings certificates (NSC). Other tax-free savings instruments will be brought under this scheme.

A report recently submitted by a high-powered committee of the finance ministry has also recommended EET be introduced and has chalked out a roadmap for it.

However, in 2007, the ruling coalition’s policies will be under scrutiny during elections in the four states. Besides Uttar Pradesh, the other states are the Congress-ruled Punjab, Uttaranchal and Manipur. The focus of the forthcoming budget, therefore, is likely to remain on the farm sector and the so-called common man.

Pension fund regulators have also approached the government saying that to make new pension schemes attractive, the government must waive EET and let them be exempt, exempt, exempt (EEE). However, with the government already placing civil servants recruited from 2004 under the EET pension scheme, equity would demand that pension schemes for others also be treated similarly.

EEE is a scheme where the money one saves is exempt of taxes at all three stages — when saved, when interest is accumulated on it and when withdrawn. Under EET, exemption is available only in the first two stages.

Officials say one way of handling the demands of pension fund regulators is to ensure that investments in tax-saving instruments for at least a decade, such as pension funds, provident funds or long-term infrastructure bonds, will attract a lower rate of taxes, which would be similar to the lowest tax slab in place.

But they admit that bringing the public provident fund under EET could prove to be difficult as parliamentarians, conscious of their middle-class vote banks, would like this instrument to remain out of EET.

“We expect only new tax-saving schemes to be placed under EET. However, politics may come into play even here,” officials said. If any of the older schemes are placed under EET, officials say, these will be “grandfathered” whereby withdrawals of existing deposits would continue to be tax-exempt, while all new investments would be part of the EET system. This would allow all savings made before the EET regime to remain totally outside its coverage.

However, with politics putting a question mark over EET, much of the report on this tax principle is likely to remain merely in the academic domain.