Despite what appears to have been lauded as a cleverly balanced Budget, Arun Jaitley's finance ministry still managed to get into a massive mess on Tuesday by making contradictory statements over a provision that is crucial to the salaried classes.

In the span of just a few hours, the government first seemed to rollback a decision announced in the Budget, then clarified that there hadn't been a rollback and followed this up by saying that the finance ministry is still considering the issue. On March 8, a week after the Budget, the government finally said that it was withdrawing the provision.

Here is everything you need to know about the Employee Provident Fund mess.

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What is the Employee Provident Fund?
The EPF is an retirement benefit scheme for salaried employees. It works as a savings instrument where a portion of your salary is put away into a fund. In most cases, 12% of your basic salary goes into the fund, with your employer also matching this amount and saving on your behalf. These funds are pooled together and invested by the Employee Provident Fund Organisation, generating interest and building up a corpus that is due to you on your retirement.

Right now, the EPF offers 8.8% returns, with more than 3.7 crore people subscribing to the fund.

What did Arun Jaitley announce in the Budget?
Until yesterday, most of the EPF was exempt from taxes. This meant that whenever you withdraw your savings from the fund, your entire amount including the interest would be tax free. This is unlike the government's other savings vehicle, the National Pension Scheme, where withdrawals are taxed. On Monday, Jaitley said he would be bringing parity to the two.

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“I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme," Jaitley said in his third Budget speech. "In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after April 1, 2016.”

Basically this meant that, whenever you retire, the government will tax 60% of the savings you have put away in the EPF at a rate corresponding to your income-tax slab. Suddenly, from being a completely tax-free savings option meant to give you a lump sum on your retirement, the government said it would be taking away a hefty portion of your money.

What happened afterwards?
The salaried classes, including trade unions, were outraged. The move was called "unfair" and "morally wrong." Most criticism pointed out that people who had steadily saved all their professional lives and put their money into a government instrument rather than, say, investing it into equities, should not have to suddenly part with a portion of that in taxes. The hashtag #RollbackEPF was the top trend on Twitter.

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Did the government roll it back?
It certainly seemed like it did. Revenue Secretary Hasmukh Adhia was quoted in the afternoon by the Press Trust of India as saying that the entire corpus of EPF contributions – basically your entire savings under the scheme – would not be taxed. Instead, only the interest earned on 60% of the corpus would be taxed.

Did the government rollback the rollback?
It sure seems like it did. Either that or the Revenue Secretary jumped the gun. A few hours after Adhia's comments, the Finance Ministry put out an official clarification explaining what its new guidelines on the EPF were.

Even though Adhia had claimed that only the interest would be taxed, this instead said that 60% of the entire amount would be taxable, except for a few exemptions. Here are the basics of the ministry's clarification.

  • If employees of private companies put their EPF savings in an annuity – an investment scheme that will effectively give them a pension income every month instead of coming as a lump sum – then their savings will not be taxed. Basically buy an annuity or you will be taxed. 
  • If the person investing in an annuity dies, the corpus will not be taxed when it goes to the heirs. 
  • For those who earn under Rs 15,000 per month, their is no change, and their savings will not be taxed. 
  • The 60 lakh EPF subscribers who earn more than Rs 15,000 per month – which the government calls "highly paid" – will have to put the EPF savings into an annuity. If they do not put it into an annuity, the amount will the be taxed when they withdraw the lump sum. 
  • The Public Provident Fund, a separate scheme, has not been changed. 

Does that settle it?
On the day after the Budget, the government attempted to clarify, insisting that it was taxing the entire funds in the EPF, but had received suggestions that it should alter its decision. After the clarification was issued, Adhia was also quoted by Mint as saying that the government will make changes to the Finance Bill to address the concerns that had been raised.

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A week later, on March 8, Jaitley told the Rajya Sabha that the government was withdrawing the provision and would only be taxing the interest rather than the entire EPF amount, effectively ensuring a full rollback.

What was the government trying?
The finance ministry's clarification claimed it was making the change to "encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account."

But the move is also seen from a few other angles, because of the government's attempt to get more people to save through the National Pension Scheme – which invests funds in the equity markets, exposing them to market risks, but giving the government freedom to leverage the funds – than through the EPF, which relies on government securities.