From 1 June 2015, workers' retirement savings exceeding Rs30,000 will be taxed at 10.3% or the maximum marginal rate of 30.6%, if they leave the employees' provident fund before completing five years of service. What is shocking is that 90% of the employees covered under the Employees' Provident Fund Organisation’s gambit do not have a PAN card. This will make them to be taxed in the highest bracket, irrespective of whether the employees fall within the Rs2.5 lakh non-taxable income limit or not.

The Rs30,000 threshold set in the Finance Bill for deducting tax from the PF balance implies that tax would be payable on contributions of as little as Rs508 to the EPF every month for up to 59 months. The retirement savings of those earning over Rs2,120 a month could be taxed at 30.9% if they don't have a PAN card.

Unlike banks that deduct income tax at 10.3% on interest income of over Rs10,000 earned from fixed deposits, the provisions for taxing PF accounts envisage taxing the principal amount (EPF contributions) as well as the interest earned (annual dividend credits). In cases where a depositor hasn't shared his PAN card details with the bank, such interest income is taxed at 20.6%.

In contrast, the finance ministry has asked the EPFO to levy the highest possible tax rate for those who do not hold PAN cards, if their accumulated PF savings are Rs30,000 or more. Once tax is deducted from those who do not have a PAN card, they are required to submit different forms like Forms 15G, 15H and 60 to the income tax department for claiming benefit.