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NPS anomaly removed, but by taxing EPF

My main complaint with this budget is that the exemption and tax slab limits as well as section 80 tax exemption amounts have not been raised

NPS anomaly removed, but by taxing EPF

The die is cast. With the three budgets out of his allotted six budgets gone, Arun Jaitley has underlined his instinct of being a cautious and incremental reformer. Nothing wrong with that, in fact, incremental changes that are tightly focussed on problem areas are probably better than wading in with big changes.

The budget is very clear on what the problems are, what the solutions are, and in what order will they be implemented. For example, the FM has said often enough that corporate taxation has to be cleaned up. Exemptions have to be reduced and the tax rate decreased. As things stand, larger companies are better able to exploit exemptions. The budget removed exemptions--which will mostly increase tax for larger companies--and made the beginning for reducing taxation for smaller companies and startups.

On savings, personal investments and taxation, the budget makes one really big move that was due, and was talked about for more than a decade. It has brought the National Pension System (NPS) on par with Employees Provident Fund (EPF) as far as taxation goes. However, it has done so not by making NPS tax exempt at the time of withdrawal, but by making both partially taxable. Forty per cent of the withdrawals from each scheme will be taxable. Thankfully, the taxation of EPF is not retrospective. That is, tax will be due only on the corpus that grows from the contributions that are made from April 1 onwards. Previously accumulated amounts will not be taxed. My guess is that there will be some protests against this move, especially because even a fairly low-income EPF member will end up reaching the highest tax bracket in case of a bulk withdrawal. If 40 per cent of the corpus is taxed at 30 per cent, then the effective tax rate is 12 per cent of the total. However, this level will be reached only many years in the future. It would be better if none of these are taxed, but parity for NPS is not so bad either.

My main complaint with this budget is that the exemption and tax slab limits as well as section 80 tax exemption amounts have not been raised. These limits effectively become devalued with inflation every year. The government's tax inflow increases even if your income increases nominally, but your inflation-adjusted post-tax income decreases and the value of the tax-exempt savings decreases. What's worse, the effect is disproportionately worse for lower income taxpayers. However, Mr Jaitley has done well to remove the bias against small investors that was built into the dividend distribution tax. Even here, the general theme has been repeated--if there is a tax anomaly, he will remove it by taxing more in some places rather than less in other places. This will probably be the pattern for years to come.