Tax proposed on retirement contributions above a cap of 7.50 lakh

While the provident fund contributions have been exempt from tax up until now, the new proposal in the Finance Bill may make post retirement difficult for private-sector employees.


Until now, the contribution of an employer to the retirement fund of an employee was tax exempt all throughout the professional life of an employee, till withdrawal. However, the Union Budget 2020 includes direct tax proposals in the Finance Bill, which call for taxing contribution to the retirement fund above a figure of Rs. 7.50 lakh per annum. Anything below that number will remain tax exempt.

This move has been called arbitrary and unfair on the part of the Government. For one, an employee in the private sector has no post-retirement benefits unlike a government employee who is liable to receive pension. Moreover, an individual in corporate already pays taxes during his or her professional years, and implementing a further tax on post-retirement funds has been termed harsh.

Currently, there is a demand to roll back this proposal. The post-retirement period constitutes more than a quarter of a person’s lifetime and sans any social security during this phase, the individual needs to earn enough to be able to retire with sufficient financial independence.

As a financial principle, people should save at least 10 per cent of their earnings for a decent retirement benefit. The provident fund statue lays down 12 per cent of a person’s earnings as post-retirement benefit.

The present status of the retirement fund being exempt from taxation should be retained as private-sector employees have no government-funded social security. On current incomes, employee are already paying high taxes and the tax only increases with higher incomes. Therefore, it is necessary that a person’s retirement fund remain tax free.

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