Story of EPF taxation & clarification from the FM

Since the beginning of time, governments have cut taxes on income and people have paid them. Some governments have tried to gain popularity by raising exemption limits or  by increasing deductions. But this government will go down in history as the one that taxed retirement benefits. Our beloved EPF.

[EPF was fully tax free when withdrawn after 5 years of continuous service. In the last budget, TDS was introduced on EPF withdrawals before 5 years and of exceeding Rs 30,000 in value. And it was also set out that if PAN is not provided TDS shall be at the highest rate of 30% +cess. Read here in detail.]

This year the government has gone out big guns after EPF. The new rules apply to private sector employees.

After yesterday’s announcement in Budget 2016 and the brouhaha that ensued on social media with #RollBackEPF, here are a set of Clarifications from the Finance Ministry that have come out today in this regard –

  • The government wants to encourage private sector employees to go for pension security after retirement instead of withdrawing the entire money from the EPF
  • With the above in mind, the government has brought both NPS and EPF at par by allowing 40% of corpus withdrawals at retirement as tax free.
  • If the remaining 60% is invested in Annuity, it shall be fully tax free. (An Annuity can provide regular pension).
  • If the person who has invested in Annuity dies, there will be no tax in the hands of the nominee/legal heir.
  • There is no change for people who are the members of EPFO who are within the statutory wage limit of salary of Rs.15,000 per month. Out of around 3.7 crores contributing members of EPFO as on today, around 3 crore subscribers are in this category. For this category of people, there is not going to be any change.

 

  • In 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 For this category of people, amount at present can be withdrawn without any tax liability. With this change, such employee can withdraw without tax liability provided he contributes 60% in annuity product. However, if he chooses not to put any amount in Annuity product, 40% shall be exempt from tax and remaining 60% shall be taxed.

 

  • There is no change in treatment of PPF. PPF withdrawals continue to be tax free.

 

  • A maximum ceiling of Rs 1,50,000 or 12% of salary has been put on contribution by employer. (Previously, there was no monetary ceilings on the employer contribution under EPF except that is should be 12% of the salary of the employee. Similarly, there is no monetary ceiling on the employer contribution under NPS, except that it would be 10% of salary).

 

  • The FM is considering 2 suggestions –
    • If the amount of 60% of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount.
    • For not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS.
    • Finance Minister would be considering all these suggestions and taking a view on it in due course.
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