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Rediff.com  » Business » BAD NEWS! 60% of EPF deposits to be taxed on withdrawal

BAD NEWS! 60% of EPF deposits to be taxed on withdrawal

Source: PTI
Last updated on: February 29, 2016 18:39 IST
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An illustration

 

To bring about parity in New Pension Scheme and other retirement schemes, the government has decided to impose tax at the time of withdrawal on 60 per cent of the contributions made after April 1, 2016, to Employees’ Provident Fund and other schemes.

At present, social security schemes run by retirement fund body Employees’ Provident Fund Orgnaisation are tax free exempt-exempt-exempt (EEE) scheme.

That means deposits, accrual of interest and withdrawals are tax free under the scheme.

To bring greater parity in tax treatment of different types of pension plans, it is proposed that the contributions made on or after April 1, 2016 by an employee participating in a recognised provident fund and superannuation fund, up to 40 per cent of the accumulated balance attributable to such contributions on withdrawal shall be exempt from tax, said Budget Memorandum.

It is proposed to provide that any payment in commutation of an annuity purchased out of contributions made on or after April 1, 2016, which exceeds 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.

Announcing measures for moving towards a pensioned society, Finance Minister Arun 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 per cent 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 per cent of corpus to be tax free will apply in respect of corpus created out of contributions made after April 1, 2016."

The minister also said that the annuity fund which goes to the legal heir after the death of pensioner will not be taxable in all three cases.

He proposed a monetary limit for contribution of employer in recognised Provident and Superannuation Fund of Rs 150,000 per annum for taking tax benefit.           

The minister also proposed to exempt from service tax the Annuity services provided by the National Pension System and Services provided by EPFO to employees.

Government has also proposed that 14 per cent service tax on services provided by Employees’ Provident Fund Organisation to employees, being exempted, with effect April, 2016.

The Budget has also proposed to increase the threshold for deducting tax deducted at source 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.

Illustration by Uttam Ghosh/Rediff.com

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