Only EPF interest to attract tax, withdrawals will be exempted

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, revenue Secretary Hasmukh Adhia clarified on Tuesday after uproar over the government’s proposal to tax withdrawals from the Employee Provident Fund (EPF).

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, revenue Secretary Hasmukh Adhia clarified on Tuesday after uproar over the government’s proposal to tax withdrawals from the Employee Provident Fund (EPF).

Employees' Provident Fund Organisation. HT Photo

Adhia said the Budget proposal to tax 60% of employee provident fund (EPF) withdrawal will affect less than one-fifth of employees with high salaries. The proposal, he said, is to tax the interest accrued on PF contributions made after April 1, 2016

Small salaried employees with up to Rs 15,000/month income will be kept out of purview of proposed taxation of EPF, Adhia further said.

This 60 per cent will also be tax exempt if it is invested in a pension annuity schemes, he said. “This is not a revenue mobilisation exercise,” he added.

Adhia said that no part of PPF will be taxed and the present scheme of investment up to Rs 1.5 lakh in a year will continue to be tax exempt. PPF on withdrawal will continue to be out of the tax ambit.

The move comes a day after finance minister Arun Jaitley announced that government has decided to impose tax at the time of withdrawal on 60% of the contributions made after April 1, 2016, to EPF and other schemes to align it with other pension schemes.

Sources said that the clarification has been sought by senior officials of the EPFO and labour ministry, who also visited the secretary early morning on Tuesday to avoid people withdrawing from the EPF scheme.

According to the Budget presented on Feb 29, employees will have to pay income tax on 60% of the amount they withdraw from the EPF after April 1, 2016. The remaining 40% will be tax free. Currently, the social security schemes run by retirement fund body EPFO are tax free EEE scheme., implying that the deposits, accrual of interest and withdrawals are tax free under the scheme.

However, uproar over the government’s move to further tax the salaried class resulted in the #RollBackEPF trending for the second consecutive day on Tuesday.

Delhi chief minister Arvind Kejriwal on Tuesday slammed the Central government over the Budget proposal to make the EPF partially taxed, saying that while the EPF withdrawals of the aam aadmi are taxed, black money holders are getting ‘amnesty’.

CPI leader Sitaram Yechury also slammed the budget. He said “The attempt to ‘clarify’ the EPF ruling by MoS Finance and the Secretary show us how clueless this government is on serious matters.”

Trade unions also opposed the government decision to tax PF withdrawals and threatened to go on strike.

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.

Announcing measures for moving towards a pensioned society, Jaitley said, “Pension schemes offer financial protection to senior citizens. I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans.”

He said, “I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognised provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after April 1, 2016.”

The budget has also proposed to increase the threshold for deducting tax deducted at source (TDS) on payment of accumulated balance due to an employee in EPF Rs 50,000 from existing Rs 30,000. Last year budget had provided that the members of private provident fund trusts will not have to pay tax on pre-mature withdrawals provided the amount is either less than Rs 30,000 or their tax liability is nil even after including the withdrawn sum to their income.

With inputs from Timsy Jaipuria