EET Becomes EEE, Capital Gains Tax Could Be A Dampener

Giving a relief to taxpayers, particularly to salaried people, government on Tuesday proposed not to tax the withdrawal from pension funds, provident funds, including PPF and life insurance schemes in its revised discussion paper on Direct Tax Code (DTC). 

Under DTC, government is preparing a new legislation to replace existing tax laws in the country. In the original DTC, released in August 2009, the government had proposed to replace the existing system of exempt-exempt-exempt (EEE) with exempt-exempt-tax (EET) in case of pension funds, provident funds and life insurance schemes. If implemented, this would have adversely affected returns from these schemes.

Under EEE, contributions in certain savings schemes are deductible from income and become tax-exempt, the accumulation are also exempt from tax till it remain invested and finally, withdrawals  are taxed. If withdrawal amount takes your income to the highest tax slab, you will have to pay the tax at the highest rate. As many institutions opposed EET, government reverted back to EEE.

In order to boost long-term savings, the revised discussion paper said rules for contribution as well as withdrawal will be harmonised and made uniform so that such savings are actually made and utilised by the taxpayer for the long term. This indicates that the minimum period to remain invested in schemes will be made uniform. At present, one needs to invest in PPF for 15 years to take the tax benefit at withdrawal and 3 years in life insurance schemes.

Government also recognized that switching over to a complete EET method of taxation for all savings instruments will call for many administrative, logistical and technological challenges. ‘‘It will require a vast network of permitted savings intermediaries, a central record keeping authority and a central agency to service around more than three crore accounts and deduct tax at the time of withdrawals."

The segregation of taxable and non-taxable amounts at the time of withdrawal and rollover from one account to another would create complexities and practical difficulties.