India's Jaitley signals rollback of pension tax plan after backlash

* India budget proposed to partially tax social security fund

* Over 100,000 people protest on social media

* Jaitley says open to review, and will respond in parliament

* Finance ministry has partly withdrawn tax plan

By Manoj Kumar

NEW DELHI, March 2 (Reuters) - Indian Finance Minister Arun Jaitley signalled on Wednesday he would roll back a controversial budget proposal to tax pension withdrawals by private sector employees after a backlash from salaried workers.

In Monday's budget, Jaitley proposed taxing lump-sum withdrawals exceeding 40 percent of an individual's retirement pot in the Employees' Provident Fund (EPF), unless the sum is reinvested in a pension product such as an annuity.

Jaitley's pensions tax plan has sparked fury among India's small but vocal professional class - only around 36 million of the country's 1.3 billion people contribute to the EPF.

Newspapers led front pages on the pensions tax, with the Hindustan Times splashing "Govt Blinks" and the Times of India saying "Salaried Class Rages" after a wave of outrage broke across social media.

"This is a draconian act and will be a killer blow to the already tax burdened salaried class," said Vaibhav Aggarwal, a financial analyst who launched an online petition against the changes.

More than 100,000 people signed the petition, leading the finance ministry to partly withdraw its plans on Tuesday. The original proposals included restricting EPF contributions from April.

"There has been some reaction. When the debate comes up in parliament, I will give the government's response as to what decision we finally take," Jaitley told a meeting with industry chambers. He declined to give more details.

A senior finance ministry official familiar with the matter said the tax on returns from the social security fund could be partly or fully waived. People on lower pay, making up to 15,000 rupees ($220) per month, would be exempted.

India's urban middle class, which mostly sided with Prime Minister Narendra Modi in the 2014 election, has shown frustration over rising taxes - the government has taxed away half the windfall of a slump in oil prices.

Monday's budget also hiked taxes on luxury items like cars, while high earners will also pay a higher tax surcharge - helping to fund a raft of measures to aid India's struggling rural poor.

If implemented, the tax plan could hit millions of employees who pay up to 33 percent tax on income, forcing them to explore other options to save for their old age.

"It will eat up their retirement savings which could be a double whammy especially in light of high inflation," said Amit Maheshwari, managing partner at consultancy Ashok Maheshwary & Associates.

The EPF, overseen by the Ministry of Labour, invests 95 percent of its $100 billion under management in state and corporate bonds. It plans a return of 8.8 percent on investments this year, in line with the long-term average, and pays out monthly pensions to retirees. ($1 = 67.635 rupees)

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Link to online protest petition:

http://tinyurl.com/gns4em2

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Editing by Douglas Busvine)