India's celebrated middle class is confronting a harsh new reality in its financial planning. A sequence of tax amendments, often framed as rationalisations, has transformed the landscape of retirement savings into a complex minefield for salaried employees. What was once a straightforward path to securing one's future now brings confusion, heightened financial stress, and an increasing tax liability on income not yet received.
The Triple Burden on Retirement Savings
Three specific provisions have emerged as significant pain points for employees across the country. The first was introduced by the Finance Act, 2020, which imposed a cap of ₹7.5 lakh per year on employer contributions to recognised provident funds, approved superannuation funds, and the National Pension System (NPS). Any amount exceeding this limit is taxed as a perquisite in the hands of the employee.
More critically, the annual accretion—be it interest, dividends, or other growth—on these excess contributions is also taxed every year. This represents a tax on notional income, levied decades before the employee can actually access the funds. For senior professionals and employees in high-cost cities or generous organisations, this feels like an upfront penalty for prudent saving.
When Exemptions Are Not Truly Exempt
The situation becomes more intricate with the National Pension System. While the government describes the regime for PF, superannuation, and NPS as "EEE" (Exempt-Exempt-Exempt), the reality at maturity is different. Under Section 10(12A), only up to 60% of the NPS corpus can be withdrawn tax-free. The remaining 40% must be used to buy an annuity, and the subsequent pension income is fully taxable. This contradicts the notion of a completely tax-free retirement corpus.
Taxing the Employee's Own Savings
The Finance Act, 2021 delivered another blow by making the interest earned on an employee's own provident fund contributions taxable if they exceed ₹2.5 lakh in a year. For many, the Employee Provident Fund (EPF) is a disciplined, mandatory savings tool, not a luxury. This change particularly affects mid-to-senior career professionals whose statutory 12% contribution on a high basic salary can easily cross the threshold, triggering an unintended tax liability.
Tax expert Ameet Patel, partner at Manohar Chowdhry & Associates, suggests these changes align with a broader government aim to phase out deductions and make the new tax regime the default option for all taxpayers.
The Bigger Picture and Call for Reform
The cumulative effect of these rules is a system that increasingly treats long-term savings as a taxable privilege rather than a necessity. Employees now face multiple tax touchpoints: on excess employer contributions, on the growth of those contributions, on their own PF interest, and later on NPS pension income. This creates a significant mismatch between when the tax is paid and when the benefit is received.
Industry bodies are urging a review, arguing that fairness and social security are at stake. In a country with an ageing population, no universal social security net, and rising inflation, these provisions are seen as detrimental. They deplete the savings that individuals might later need for critical expenses like healthcare, where insurance for seniors is often prohibitively expensive.
The result is a growing sense of being squeezed among India's salaried taxpayers, who find their trusted retirement planning pathway now layered with caps, triggers, and compliance headaches.
