Finance minister Arun Jaitley has done well to roll back his taxation plans on the EPFO, not because he was taxing the middle-class but because the proposals were unfair. First, to the extent employees were contributing more than the statutory amount to the EPFO, they were being taxed already. More important, he was forcing people to buy lower-paying annuities. Also, to the extent the same tax proposal did not apply to bureaucrats, it was unfair. But that’s the easy part of the job. The principal reason for Jaitley’s proposal was to bring parity between the EPFO and the National Pension System (NPS), and this hasn’t happened. Under the NPS, 40% of the corpus had to be mandatorily converted into an annuity scheme and 60% would have been taxed. Under Jaitley’s plan, 40% will still be converted into an annuity, 40% can be withdrawn tax-free and a tax will have to be paid on the remaining 20%—that’s better than earlier, but why force NPS-subscribers into this sub-optimal plan? Right now, they earn 10-11% while, with annuities, they will earn 6-7%—that’s the current rate for an annuity is given for life to an individual and then the spouse with the capital returned to the child on their death.
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