Possibly, all of the budget summaries floating around the print and digital media, talked about how adverse it (budget recommendations) is to the working class, the employees of an organization, citizens like me and probably you. While I partially agree with some of the statements made, one of the (highly) argumentative benefit that I see is from the initial call-out to tax the lump sum withdrawal of one’s Provident Fund over and above 40% of the corpus.Pensions is a topic close to my heart. Part of my work while with Invest India Micro Pensions was trying to get the underprivileged into a habit of contributing towards their retirement. The organization’s top ranks, individuals who contributed towards architecture of the New Pension Scheme imparted a lot of knowledge too. Owing to these learnings, this school of thought believes that there needs to be a fundamental shift in behavioural patterns, among Indians, towards retirement savings.
Let’s first try and understand what the new recommendation is – Mr. Jaitley, the Finance Minister, very clearly mentioned that he is taking measures towards moving to a pensioned society. He deliberated that the Provident Fund withdrawals as a lump sum above 40% of the corpus (includes both employees and employers contribution and a fixed compounded interest set by the
Let’s try and get to bed with this idea, why would the finance ministry of a soon-to-be-aging country want to tax the savings of a hard working employee over-and-above all the income tax he/she has already paid? Now read the above recommendation again. The Ministry’s real intention is to only tax the lump sum withdrawals, and NOT the entire savings. It is quite simply the stick approach being used to cultivate a behavior, an attitude towards financial independence in the non-income years and a point of view to use the saving for the purpose it was saved.
Pensions as a subject in India is more often than not, disregarded. We tend to cozy up with the idea of cosmic karma, where a working class hero (read parents) spent on their kids till they start earning, kids in turn indebted to spend on the parents when they stops earning. While all the emotion in this is absolutely spot on, the practicality isn’t. India as a nation has to move towards saving for their retired years, the government would rather take the blame of forcing good behavior over having thousands of aged financial-dependents with no one to depend on.
While an incentive to annuitize, than a fine to withdraw lump sum, would have been a populist recommendation, we should not fret the tax to improve our behavior, it should be welcomed as a strategy for a better tomorrow, for the government and for us.
(The article is authored by Aashim Joy, who is an Employee Benefits Actuarial consulting with a private company)
(Image: Indiatimes)