Let us worry about provident fund taxation after the parliament passes the bill. Let us look at some of the logic..and before that at the history.

Sometime in the 1990s the Government of India woke up to one ponzi scheme called the US 64. Nobody knew what the NAV was. You invested in April, and you sold in March. Thus you made short term capital loss, and set if off against other income. In the meanwhile you got the dividend which was tax free to the extent of 60% (remember 80M?). This had to stop, and it did stop. Yes many people cried fraud, etc. but largely it was pulled off.

MMS woke up to another ponzi scheme called the ‘Defined Benefit scheme’. Here the government said we will not pay ‘defined benefit’ but you will have to create your own corpus and create a pension. NPS was born.

IN 2016 Arun Jaitely (or perhaps J Sinha) woke up to another ponzi called the ‘provident fund’. Imagine you are earning a salary of Rs. 50,00,000 and you are allowed to contribute Rs. 600,000 to your provident fund. Great. You then make a Rs. 400,000 voluntary contribution. All this goes to the government pension scheme and you get 8.4% p.a. TAX FREE. This is awesome is it not? and you get it year on year for the next ‘n’ number of years till you withdraw the money. There is NO reason at all for the government of India to be borrowing at such a high rate and that too tax free. The government can today easily get money at say 7% tax free – see Hudco bonds which are being sold today in the market at 7.5% for 15 years.

Maybe it was the government’s way of reducing the interest rate by taxing the interest. They have made a mess. I will wait for the parliament to pass the bill before I comment more on that. The Government needs to cap the Provident fund contribution to Rs. 150,000 for a person like the public provident fund has been capped. Even better, the government should reduce interest rates on all the government saving schemes, and bank deposits. The government could make bank interest tax free for senior citizens and reduce the interest rates to say 7% p.a. AND PEOPLE WILL HAPPILY TAKE IT. Taxing provident fund withdrawal is painful. The problems obviously got worsened in recent times when salaries have gone into crores. So for a person who is contributing a big amount of provident fund the government is subsidizing the provident fund. Best would have been forcing more big corporates to move to the NPS or to their own scheme. Here the government need not give any subsidy.

The government could have got more money by raising the ceiling amount in PPF to say Rs. 10,00,000 and keeping the interest rate at 7% p.a. tax free. Or link it to the 10 year Gsec and make it 1.5% lower than Gsec with an annual re-set. Easier steps than taxing the interest.

In case of companies who manage their own Provident fund contributions too they had to match the government’s ponzi scheme and this was almost impossible. Then there would be employees who would leave their job but not claim their provident fund (advisers told them to leave it to earn 8% pa tax free). This had to stop.

The government was paying (is paying) a much higher rate of interest because there is no good secondary market in the retail debt segment. Now they are saying that they want to develop a secondary market (believe me RBI never wanted this according to many bankers). Let us see if RR makes a difference to this approach. They could start by making all the post office schemes available online. Yes it could take 10 years to make it compulsory to go online…but at least the offer should be made for people to get it online. I am convinced that there are more fake national savings certificates in circulation than what we are willing to accept. That will stop.

The government should force all companies with more than Rs. 10,000 crores of public money – equity, debt, bank loans – should be forced to meet their financial requirements by issuing bonds to the public. So say a big company like LnT or even a smaller company like Indigo which have a lot of requirement for funds will all raise bonds. Once corporate India does that they SHOULD force banks, municipalities, and state governments to raise money from the public…

Ha! if wishes were horses..



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  1. ok Let us talk about earning INR 50, 00, 000 , a individual would take minimum 10-15 years to reach these levels at india in 90 % of cases( I am not talking about IIM grads, IIT grads who make to flipkart) . this is something many Indians aspire as a sure shot way of safe retirement. US is offering 401K accounts Roth accounts where company will contribute equal share
    VPF is capped at 12 % of your basic and DA (this is a government rule). So no one can push 5-6 lakhs inside their VPF side it is auto calculated on basic + DA. I stated this point for reader benefit just to let know that you cannot play with your VPF more than 12 % ( which will reduce your take home)
    PF money is used by government and trusts for many causes , I have a tea vendor on a roadside whose daily revenue selling snacks is 12k on weekdays and weekends is 8k . He does not pay a single paisa tax. LEt the employed people have some preferential treatment. the white money is the most taxed
    Secondly Indian equity market has historically and currently never evoked confidence in the manner which developed markets do. the moment you create a model which says it invest x % in equities there is a lot of concern
    NPS made good returns for 3 years, current financial year it is quite negative. So if this happens for 2 years in continuation, Indians will not have the appetite. Sure withdrawal driven by panic will be taxed and one is probably forced to continue
    When it comes to EPF many private organizations are only having this component as the retirement scheme and retirement benefits
    These organizations mostly do not have any sick leaves( some form of maternity or paternity leave), maximum holidays capped in the range of 15-25( you can use them to enjoy or fall sick)
    PF is capped to 1,50, 000 INR per year maximum submission capped to 25000 inr in a single transaction

  2. I always thought the second hand income should not be taxed. To explain this think this scenario. Me and my friend get same salary. My friend spends all his money and he does not need to pay any further tax. On the other hand I invest some part of my money and get some returns. Now I need to pay the tax for the returns. I feel it is like punishing the people who invest. Is it fair?

    If wishes were horses…:)

  3. Never though that PF interest was a subsidy. If it was subsidy I am happy to let it go. I don’t want to insult myself living on subsidy

  4. I didn’t understand that PF interest is subsidy. Obviously this money is (should be) getting invested somewhere by government which should give some returns right?

  5. Please first stop the following ponzis before pointing to EPF :
    1.Defined benefit pension to yesterdays employees and move them to defined contribution .
    2.Interest deductions on second homes
    3.Long term capital gains on equity
    4.All forms of subsidies
    5.Refinancing psu banks out of taxpayer money
    and many many more…

  6. Dear Subra,

    The EPF has a pension component built inside unlike NPS.
    They are already swindling 8.33% of the Employer contribution (limited to 15000).
    If a person joins at 20 and retires at 58 with Rs.15000 at Basic+da then the max pension can be: Pensionable salary(15000) x Pensionable service (38 years) / 70 (god knows how they arrived at this factor) = 8142/month. This is a fixed amount and will not change until death of the pensioner.

    Contribution to EPS : 15000×8.33%=1250 x 12mon x38yrs with a qtrly comp and int rate of 8.75% will result in a corpus of 44.9 lakhs.

    The pension amount works out to 2.18% yield. Now they want to tax the accumulated corpus also.

    If govt is so concerned to create pension society let them increase the EPS.

    Achhe din – has come.


  7. I think this blog by Subba is completely out of context with serious flaws in assumption. May be that he has not worked in any company of repute to understand the implications.
    1. All ‘exempted trusts’ who are allowed to manage their own funds are having ‘surplus’ and not ‘deficit’ in their trust a/c. This is because they invest prudently with proper safeguards and layered decision making process.
    2. Government is not obligated to give 8.8% interest on PF. This is Government’s decision (albeit EPFO board) which is finally vetted and approved by the Finance Ministry, then, only the decision is approved and published. The Government can any day reduce the interest on PF if it feels that it cannot pay 8.8% or whatever percentage it deems fit. This is absolutely nonsense and horrendous to charge tax on one’s life time hard earned retirement money at the time of withdrawal.
    3. In India, we do not have any pre-defined and pre-fixed pension schemes. PF interest is subject to change by the Government and NPS return/interest is also subject to market condition. Government is in fact not losing any thing in NPS Scheme. It is managed by private fund managers.
    4. This so called ‘black hole’ as PF is created by Government when it was finding it difficult to fund its various schemes and therefore resorted to taking funds via this route called PF money.
    Not able to understand last para of your blog.

  8. Govt could have just disallowed VPF option going forward. That simple action would have been more manageable and effective than all this mess. It would have addressed bulk of the issue too.

  9. Wow!!!!!!
    the person who waas advocating ppf returns are less considering real inflation is now saying 8.4 is high..
    Hail modi

  10. “Imagine you are earning a salary of Rs. 50,00,000”.

    Fact : 90% of the people can just imagine this salary in dreams not in real life. so whole basis of discussion itself is flawed in the blog.

    Let me take a real world scenario. Suppose I am earning just 7 Lakh/annum and EPF contribution is 3K/Month. so final amount will be 1.2 cr [considering 8% salary hike every year]. out of this amount around 75 lakh will be interest and some 43 lakh is taxable. final tax amount(30% interest rate] will be 13 lakh. for a middle class guy 13 lakh is very big amount to pay in tax

  11. Maybe Subra should’ve filed this piece under the previous ‘how to be unpopular’ article. :). It seems to have rubbed people the wrong way :). Of course, in all likelihood, that’s what he was expecting 🙂

  12. with the huge advantage of knowing Subra his reaction could be the following:

    1. Look it is a free blog – take it or leave it.
    2. Surya – you need to watch Deewar film again
    3. Kamal Garg – Subra could not care about a managed Trust. Many trusts are going to the government scheme because it is expensive to do the whole function in house unless it is a big company.
    4. Ramesh: agree with you
    5. sagar the article cannot be hand written for you and sent by hand delivery. If it is not relevant for you, move on
    6. Faheem: In an unpaid blog popularity does not help at all..

  13. If Govt wants to move to EET regime, make it proper E at the beginning. As of now EPF is not proper E at the beginning.
    I have no issue with paying tax. I have issue with double taxation. As of now EPF is pooled with others in section 80 and people like me have other avenues to get to the limit of 1.5L (I can choose which component to be considered, right! other wise not fair when compared to somebody who doesn’t have EPF).
    So I pay full tax on employee contribution. And pay full tax on 1.5L+ amount on employer contribution and then 60% of full tax again when withdrawing. The effective tax will come to 48% for employee contribution, little more than 30% on employer contribution.

  14. Make it EET – maybe a new section where all contributions upto N Lakhs in PF are adjusted against your income. Similar to IRAs.

    And just make the damn thing fully voluntary,I don’t see why it should be an obligation.
    There some things I can do far better than the govt, and managing my money is one of them.

  15. Sanjay Singhaniya

    I agree with this suggestion as it is better way to ensure retirement corpus per person: The Government has already capped the Provident fund contribution to Rs. 150,000 for a person like the public provident fund has been capped.
    Following suggestions would make EPF/PPF bad investments because of their illiquidity and yearly resets of interest rates : The government could have got more money by raising the ceiling amount in PPF to say Rs. 10,00,000 and keeping the interest rate at 7% p.a. tax free. Or link it to the 10 year Gsec and make it 1.5% lower than Gsec with an annual re-set. Easier steps than taxing the interest.

    @Subra Sir, why I would bother to invest in EPF when I know mutual funds from ICICI which exclusively invests in gilt bonds and also keeps maturity between 8 to 12 years – ICICI Prudential Constant Maturity Gilt Fund.

  16. The post is not based on fact. The gov.in does not pay a paisa out of its pocket towards the returns, unless you count the lost taxes.

    The EPFO and the various exempted trusts purchase Gilts and other securities at market rates. In fact due to the nature of the investment pattern, gov.in has ensured that there is a ready market for Central/State/PSU borrowings.

    You should read the reactions from the EPFO when higher rates (aadat se majboor) are demanded by the trade unions..they quote their portfolio return.

    To put it in a different fashion..the EPF is a mutual fund and provides you a composite tax free return on debt (and now with a mix of equity).

  17. I agree with the comments made by NN – my previous commentator.
    Govt is not losing any thing in this whole game but is having a ready made market for their fiscal deficit / market borrowings.

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