SSB Awareness series: EPF Taxed in new Budget

  As per Budget 2016, all contributions and interest accrued to employee provident fund (EPF) before April 1, 2016, will not attract any tax on withdrawal. Withdrawal of principal amount contributed to EPF after April 1 would also remain exempt from any tax. It is only the interest on contributions made after April 1, 2016 which will be taxed.

There is no change in the status of public provident fund (PPF). EEE (tax exempt at the time of contribution, tax exempt on returns and tax exempt on withdrawals) scheme will continue for PPF. There is no 40 per cent limit on PPF. It will be 100 per cent exempt.  Out of the 3.7 crore active contributors in EPF, about 70 lakh corporate sector employees with high salary would be impacted by the proposed taxation of EPF interest on withdrawal.

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·         There are about 3 crore people whose monthly income is less than Rs 15,000. They are called eligible members of EPF. For this 3 crore people, there is going to be no change in status of taxation. They can withdraw their 100 per cent corpus when they retire without any taxes and the distinction would be made clear in the notification. (AP)

·         The purpose is not to mobilize revenue. Govt. want people to move towards a pension society. So we have given another incentive wherein the investment in annuity product will be tax exempt. Annuity product was always taxable. But here, even after death of a person when the money is transferred to legal heir, we have made it tax exempt. Govt. is worried about people blowing off the entire 100 per cent amount on retirement and not investing in pension products. Otherwise, the responsibility comes on government to take care of healthcare.

·         PF Withdrawal Tax in Budget 2016: Explaining further the government proposes to change the provision not to take tax from salaried class, but to help people plan for retirement better. "Govt. is saying, 40 per cent of it (EPF amount) will be available at the time of retirement. For the remaining 60 per cent, we want to encourage you to invest in annuity product. So if your corpus is Rs 1 crore, Rs 40 lakh you withdraw and use it for house construction or other work... Rs 60 lakh you invest in annuity so that you keep getting pension

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The issue can be explained like this: in the case of the Employees Provident Fund, both the employer and the employee contribute to a fund, and interest is accrued on both of them separately. On retirement, the entire amount (what the employer contributed, what the employee contributed and the interest accumulated on both of them separately) can be withdrawn. The government now wants to tax 60 per cent of the amount contributed by the employee after April 1, 2016 and the interest on that (which should in most cases be the same as the amount contributed by the employer and the interest on that).

There seems to be some confusion whether the tax applies on the total corpus created after April 1, 2016, or only on the corpus created from the employee's own contribution after April 1, 2016

The government wants to nudge (some would say force) people to invest around 30 per cent of the total corpus created by contributions made after April 1, 2016, in pension products, rather than withdraw and use that amount. The tax payable on the annuity income is expected to be nil or very low as the income will be spread over many years, and it is likely to be below the minimum amount not chargeable to tax in those years. Thus, the choice is between paying a tax on 30 per cent of this corpus or spreading the receipt over the rest of your life tax free. This tax does not apply to government babus and those drawing basic plus DA of less than Rs 15,000 per month. 

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This has wrongly been seen as a "retirement tax". It is essentially asking a small number of the EPF subscribers (around 20 per cent of all subscribers) to spread out the withdrawal of a portion of their EPF corpus. One of the reasons that the government wants to do this is to equate the tax treatment of EPF with NPS. But this clause is hardly likely to do that. The government has exempted 40 per cent of the total corpus created from NPS from tax. So essentially, in NPS you will need to spread over 60 per cent of the total corpus created from the beginning it versus 30 per cent of the corpus created after April 1, 2016 as far as EPF is concerned. So NPS continues to suffer from worse tax treatment.

In any case, the government is likely to be forced to roll back the EPF provision in some form or manner. Hopefully, at that time, they will ensure that the NPS is given the same tax treatment on withdrawal as the EPF is finally conferred with.

About the Author: Ramandeep Singh gill from Delhi completed BSC in Hospitality and Hotel administration from IHM, PUSA. He loves to be surrounded by nature. Playing badminton is a stress buster for him. Great pet lover and interested in reading newspaper. Running and cycling always makes him feel energetic. Currently working as administration assistant cum IELTS Lecturer, he is a die heart defense aspirant.