The one thing in the budget that boomeranged on Finance Minister Arun Jaitley was the proposal to tax provident fund withdrawals in excess of 40 per cent, upon retirement. There was a simple way of not paying tax on the remaining 60 per cent. Invest it in an annuity scheme of, say the LIC. The annuity payment—monthly, quarterly or annual—will not be taxed either, making for a lifelong pension. On death of the account holder, the principal will go to the next of kin or nominee, without any tax payment.
The noise and threats of protest notwithstanding, I think it was a brilliant idea , in keeping with the times.
Provident fund, whatever the origin, is seen as a retirement corpus. In the “old economy”, people withdrew from this for child's education or a spouse or parent's bypass surgery, if not to buy a house. These were big life events for which the salaried class had little option but to dig into the PPF or EPF kitty.
Years ago, housing loans were unheard of or prohibitive. Not any more.
Banks are falling over each other to offer a 25-year-old with even a Rs 10,000 or 15,000 rupees a month income, a housing loan. Of course, the income, among other things, decides the amount of loan. The interest used to be around 16 per cent in the early 90s. Now they have moved way south. And there is significant tax exemption on account of repayment of interest and even principal borrowed. The government is well within its rights to expect you to avail of this to buy an apartment, not withdraw from the provident fund.
The idea of health insurance—mediclaim policy—has been around for some time, and caught the fancy of salaried people. Now the insurance companies are marketing many versions of it. There is tax exemption, too. And for those cannot afford that, the government has stepped in with Swasthya Bima Yojana, which has now been extended in terms of coverage and amount, with huge cost subsidies. To add to this, there is tax exemption or deduction for money spent on preventive health check ups. Should anyone want to dip into the PPF or EPF savings for a health set back? No way.
There are educational loans, too.
If a salaried person has not been able to buy a roof over his head or a mediclaim policy or pay the child's college fees while he was earning, the impression is of someone lacking financial discipline—in this age of mutual funds and tax-free bonds.
What happens when he withdraws the entire sum in his PPF, and is without an income after a few years? Should tax payers take care of him like they do the industrialists who are responsible for the non-performing assets of banks?
So, it is obviously wise to ensure people invest in annuities. But the resistance to annuities is what the government has to see and address. They are a pittance of comparable market instruments! The solution, apparently would be to make the annuities so attractive that people can confidently leave their life's savings with a government-backed agency.
The government's approach in taxing the PPF withdrawals in excess of 40 per cent, however, has been explained not as leading to a secured life in sunset years, but to reduce the “benefits to the well-off” as the Economic Survey 2015-16 calls it. The survey puts the “implicit subsidy” on account of PPF at Rs 11,900 crore!