The EPF tax is dead and buried, at least in the form that it was proposed in the Union Budget. However, the Finance Minister has not withdrawn all the retirement-related measures in the budget. His NPS proposals still stand. Before the budget, EPF was tax free on withdrawal while NPS was taxed. In the budget, Mr Jaitley said that all superannuation schemes should be at an equal footing. However, after the withdrawal of the EPF tax, NPS is again at a disadvantage because it is taxed. Actually, the entire episode has brought attention to three fundamental flaws in NPS taxation. The government must resolve these issues sooner rather than later.
Firstly, of course, NPS withdrawals at retirement are taxed while EPF isn't. Since, in his speech, the FM has admitted to the desirability of NPS and EPF having the same structure, this should be done as soon as possible. A related matter is that NPS withdrawals for government employees are tax free. Only private individuals have to pay tax. There is no just basis for this distinction. Government employees must pay the same tax as private individuals.
Secondly, it is completely unfair that NPS is taxed as income. By the nature of the investments, they should be treated as capital gains and adjusted for inflation by permitting the application of the cost inflation index.
Thirdly, while withdrawing the EPF tax, the Mr Jaitley and his junior minister admitted the error of forcing everyone into the same pension instrument, that is, an annuity with an insurance company. Different people have different needs, but apparently, this principle applies only to EPF members and not NPS members. NPS members are forced to buy an annuity. Shouldn't the same principle of choice be applied to NPS?
A full equalisation of NPS and EPF must be part of the next stage of supperannuation reforms.
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