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Only EPF interest to be taxed

Budget for 2016-17 may impose a retirement tax at the time of withdrawal on 60 percent of contributions made after April 1 to EPF

Policy Pulse
Publish Date: Mar 1 2016 11:37AM | Updated Date: Mar 1 2016 3:18PM

Only EPF interest to be taxed

The government on Tuesday clarified that only interest accrued on 60% of the contributions to the Employee Provident Fund after April 1, 2016 will be taxed while the principal amount will remain tax exempt.

 

Hasmukh Adhia, Revenue Secretary clarified this after uproar. He said that the Budget proposal to tax 60 percent of EPF withdrawal will affect less than one-fifth of employees with high salaries. 

Earlier, there was a fear that Finance Ministery may impose a retirement tax at the time of withdrawal on 60 percent of contributions made after April 1 to EPF and other schemes, after the budget presented by Finance Minister Arun Jaitley on Monday.

 Social security schemes run by retirement fund body EPFO are tax free ‘Exempt-Exempt-Exempt (EEE)’ scheme under which deposits, accrual of interest and withdrawals are tax free.
 
In order to bring greater uniformity in tax treatment of different sorts of pension plans, it is proposed that the contributions made on or after April 1, 2016 by any person in a recognised provident fund and retirement fund, up to 40 percent of the accumulated balance attributable to such contributions on withdrawal shall be exempt from tax, said Budget Memorandum.
 
Observers say this is another move by the government to nudge employers to shift to the NPS from the EPF.
 
It has been suggested to provide that any payment in commutation of an annuity purchased out of contributions made on or after April 1, which surpasses 40 per cent of the annuity, shall be chargeable to tax.
 
Under the existing provisions of section 80CCD, any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme is chargeable to tax.