New Delhi, (The Telegraph): The Narendra Modi government's resolve to tax a part of provident fund withdrawals is facing a test following a furore.

The finance ministry said in a statement today that it had received representations urging the government to levy tax only on the accumulated returns - the interest earned - and not on 60 per cent of the corpus at the time of withdrawal, which has been proposed in the budget.

"The finance minister will consider these suggestions and take a view on it in due course," the note said.

In the budget unveiled yesterday, the Centre had proposed to tax 60 per cent of withdrawals from Employees' Provident Fund (EPF) unless the money is invested in annuities.

The government had said that 40 per cent of the PF corpus could be withdrawn on retirement tax-free. The remaining 60 per cent would have to be parked in annuities - which typically offer very low returns. If the retiree did not wish to park this sum in annuities, he would have to pay tax at the marginal rate.

The move is seen as a major tax reform that brings about parity between the EPF - where organised sector employees above a certain income threshold are mandatorily required to contribute 10 per cent of their basic salary plus dearness allowance with a matching contribution from the employer - and the National Pension System (NPS).

The NPS was originally conceived as a pension system in 2004 for civil servants and was later extended to other citizens on a voluntary basis. The assets under NPS management have since swelled to over Rs 42,200 crore in six million individual accounts.

The government is also considering a plea that there should be no monetary limit on the employer's contribution under the EPF because there is no such limit under the NPS.

At present, the employer's contribution to the EPF is capped at 12 per cent of the salary. Any contribution above Rs 1 lakh is treated as a perquisite in the hands of the employee and taxed accordingly. The latest budget proposes to raise the threshold to Rs 1.5 lakh.

Revenue secretary Hasmukh Adhia had said earlier in the day that only the interest component on 60 per cent of the EPF corpus would be subject to tax on withdrawal and the principal amount would not be subject to taxation.

"Taxes can be saved if the non-tax-free money withdrawn from the EPF is invested in an annuity scheme," Adhia added.

Sudatto Sen, a Delhi-based tax consultant, said: "The point is taxing the principal amount is not done internationally or in India. The government taxes the interest income on fixed deposits, not the principal amount, when the FD is withdrawn."

No announcement has been made on meting out a similar tax treatment to the government provident fund (GPF) that covers civil servants who joined before 2004 and defence personnel. However, only civil servants make contributions to the GPF and there is no contribution from the government.

Officials said a Twitter war had broken out over the issue, with ordinary citizens venting their ire against the budget proposal. A Twitter handle in the name of Ashok Khemka, an IAS officer who exposed an alleged land scam in Haryana during the UPA regime, said: "Proposed EPF tax is anti-worker and pro-finance."

Some BJP MPs are also believed to be against the tax measure as it could prove to be immensely unpopular with the middle class.

The RSS's labour wing, the Bharatiya Mazdoor Sangh, also voiced its opposition. "Taxing PF means double taxation. PF is deducted from a salary on which workers have already paid tax," said BMS general secretary Virjesh Upadhyay.

But, until now, provident fund savings were exempt from tax in all three phases: contribution, accumulation and withdrawal. The government had earlier tweaked rules to ensure that provident fund savings could only be taken out on retirement.

The government said the majority of the EPF members earn equal to or less than the statutory wage limit of Rs 15,000 per month. Out of around 3.7 crore contributing members, around 3 crore subscribers are in this category. "For this category of people, there is not going to be any change in the new dispensation," the finance ministry said.

"However, in the EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly-paid employees of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this," the ministry said.

While seeking to justify the tax on a portion of the EPF withdrawals, the government said when a person investing 60 per cent of his EPF proceeds in an annuity scheme dies, the heirs will be able to withdraw the amount without having to pay any tax.