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Is the move to tax interest on EPF a good proposal?

March 02, 2016 19:12 IST
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Sandeep Shanbhag, a chartered accountant and director of Wonderland Consultants, a tax and financial advisory firm, discussed the impact of Budget proposals in a chat with’s readers. 

Illustration: Uttam Ghosh/

Here’s the chat transcript…

baban patil: I earn 14 lakhs annually. I have invested in a house for which I am paying an EMI of Rs 28,000. I pay a rent of Rs 15,000. What are the ways I can save tax?

SandeepShanbhag: you are paying emi as well as rent?

SandeepShanbhag: assume it is for different properties. if employer offers hra, then claim the same. then mediclaim 20K and 80C (150K) elss, insurance, tuition fees etc.) - home loan interest deduction can be availed of

Tarakeshwar Shaw: Whether there is any benefit to salary class in this budget who is in 10 lakhs bracket?

SandeepShanbhag: no

Tarakeshwar Shaw: What is the proposal of provident fund taxable if it is more than 150000 yearly ? Please clarify.

SandeepShanbhag: it is proposed that out of contributions to one’s PF made on or after the 1st of April, 2016, up to 40% shall be exempt from tax. The balance 60% if withdrawn as a lump sum will be taxable. However, if this 60% remaining corpus is invested in an Annuity, no tax is chargeable. In other words, the entire corpus will apparently be tax free, if invested in annuity.

Avinash Nejkar: Can I withdraw the full amount of PF (my and employer's contirbution) after my resignation? I want to use this money for repaying home loan. I can't wait till 58 yrs.

SandeepShanbhag: As per a recent notification (GSR 158E dated 10th Feb, 2016) an employee can only withdraw his contribution and the interest thereon upon ceasing to be an employee.We are told employers are taking this to mean that this clause will get attracted to any cessation of employment other than retirement – however – it so happens that retirement is also a kind of cessation!!

Avinash Nejkar: Even if I want use this money for repayment of loan, for this reason also govt.won't give full amount?

SandeepShanbhag: As per a recent notification (GSR 158E dated 10th Feb, 2016) an employee can only withdraw his contribution and the interest thereon upon ceasing to be an employee.We are told employers are taking this to mean that this clause will get attracted to any cessation of employment other than retirement – however – it so happens that retirement is also a kind of cessation!!

Tarakeshwar Shaw: What is reducing rate of interest on personal loan?

SandeepShanbhag: reducing rate of interest seems to be that the emi includes a part of principal being paid back - so every installment the interest quantum gets reduced

baban patil: Is the move to tax the interest on EPF a good proposal?

SandeepShanbhag: it is in line with the EET (exempt exempt tax) system of taxation which is as per international (best?) practices - however, whether it is a good decision or not is a moot point. first of all it affects only the salaried class which is as it is getting squeezed on account of high prices and virtually no tax deductions.

SHARAD PANDEY: I invested Rs. 50000/- in 'axis Long Term Equity scheme (DIRECT PLAN DIVIDEND OPTION) in August 2015. Dividend was declared in this scheme on 25-Jan,2016. Axis MF informed me via email that distrIbutable surplus was available under the REGULAR PLAN but not under DIRECT PLAN. Is not the explanation weird? Under 1 scheme, norms differ!

SandeepShanbhag: thats really really surprising. this is the first i am hearing of this

thokur vasanthan: Thanks. I like to know the meaning of " recognized employee provident fund?"

SandeepShanbhag: recognized provident fund - RPF

Tarakeshwar Shaw: Whether I can take loan from my EPF after 1/4/2016 and whther that would be taxable?

SandeepShanbhag: you can take a loan - there would be no tax on the same

ramkrishna: hdfc personal loan when i am returning i am returning with interest ,interest part should be allowed and i am reduce the taxable amount to the extent of interest which i am paying during the year

SandeepShanbhag: the interest that you pay is deemed to be your personal expense - the law does not offer any tax deduction on such personal expenses

sharad wagh: I was not aware of this!! since when is this applicable?

SandeepShanbhag: the actual wordings are something like this“(1) The Central Board, or where so authorised by the Central Board, the Commissioner, or any officer subordinate to him, may, on an application made by a member in such form as may be specified, authorise payment to him from his provident fund account not exceeding his own total contribution including interest

SandeepShanbhag: thereon up to the date the payment has been authorised on ceasing to be an employee in any establishment to which the Act applies.”

SandeepShanbhag: its from immediate effect

SandeepShanbhag: it is 30% tax 7.5% penalty 7.5% surcharge. so basically it is 45% since tax by any other name continues to remain a tax!

Harshal S: What are chances that Kejriwal defeating Modi from Varanasi in next election?

SandeepShanbhag: your guess is as good as mine. however, the sense i am getting is that the small taxpayer - esp the salaried class continues to get the feeling of being squeezed for more and more tax every year irrespective of the government in power

sharad wagh: there has also been an increase in surcharge i believe? what will this increase raise the effective tax rate to?

SandeepShanbhag: earlier on account of the 12% surcharge, the effective tax rate for those who earned more than a crore was 34.61% - now it would be 35.54%

HENRY ANTHONY: IT will not be on the entire PF amount. It will be only on the interest that you will earning on the amount that is deposited in your account. That is upto 60% of only the INTEREST. I am sure a person who is earning less than 20 k will not be hurt much. But employees whose Basic and DA is more than 30 to 40 k will end up losing few 1000s maximum.

SandeepShanbhag: well, there is no clarity yet - we will wait for the final law to be passed. while it is true that the govt is considering bringing in the tax only on the interest and not on the contribution, the full extent of the tax would depend upon the time period that the amount is invested / locked in - the more the time, on account of the compounding element, the more the tax will work out to

v-k-vij: Anything im budget for OROP

SandeepShanbhag: regrettably no

sharad wagh: what is the rate of service tax after the budget?

SandeepShanbhag: from june 1 2016, the additional 0.5% krishi kalyan cess will raise the service tax rate from 14.5% to 15%

baban patil: How can I save tax on LTA?

SandeepShanbhag: by actually using the lta for travel as per the specifications. lta is an expense led deduction and not an income deduction per se

sharad wagh: are mutual fund dividends covered under the rs 10 lacs taxable rule?

SandeepShanbhag: no mutual fund dividend either from debt or equity mfs is not covered - only equity share dividends in excess of rs. 10 lacs are taxable

sharad wagh: hello, will ppf will be taxed?

SandeepShanbhag: The government has clarified that PPF will not be taxed. At least for now :))

thokur vasanthan: Opted for CPF and not going to get pension. is it applicable the sixty and forty?

SandeepShanbhag: as per my understanding, this rule is applicable to recognized employee provident fund - however, we will have to check the fine print to see if cpf is covered

melathil thomas: [SKB] suppose the interest on FD received in the first year is reinvested by the party(spouse) who received the gift and whether the income on this interest is added to the donors income or receivers income?

SandeepShanbhag: no interest on interest is not to be clubbed

Satyabrata Dash: Is there any relaxation for individuals who have availed home loan and income beyond 10 lac?

SandeepShanbhag: your query is not clear. but there is no relaxation as such. only if the property sought to be puchased is below Rs. 50 lakh and the loan taken is up to Rs. 35 lakh, there is additional deduction of Rs. 50,000

jha bk: Today what are avenues for tax free earning like agricultural income, LTCG in India. Please guide with list

SandeepShanbhag: there are not many tax-free avenues left. LTCG is one common one. Not everyone can get agricultural income as such. Then there are tax-free bonds available on and off which one can invest in. Thats about it. However, instead of looking for tax-free income, you should look at maximizing post tax income.

Adnan Chogle: Sir i want to invest in fixed deposits plus i need exemption of tax..what would be the best option for me?

SandeepShanbhag: Tax Saving Bank FDs - these are normal bank FDs but any investment in them offers a tax deduction u/s 80C up to Rs. 1,50,000

dinesh: Sir i have invested in mutual funds, how is this budget going to impact my investment?the budget often impacts the bottom line of every company.

SandeepShanbhag: there are no provisions per se that impact mutual funds budget seeks to tax dividends but this is limited to dividends from equity shares only and not from mutual funds. so as far as mfs no news is good news

BHAVIN MEHTA: Presemptive taxation for businessman set at Rs 2CR and Limit for getting books of accounts remains at 1 Cr How is it possible as for Audit proper books are required.

SandeepShanbhag: thats true - however, its always a good idea to have your books in place and in order irrespective of the specified threshold. also, an audit is like a general check up of the financial health of the business. one should get it conducted irrespective of whether the law ordains it or not.

Premananth Patharath: My HRA from company is Rs.500/- pm which was fixed long back but actually I am paying Rs.3000/- pm as rent. Can I claim Rs.36000 (12x3000) or 6000 (12x500) for IT concession? pls. clarify.

SandeepShanbhag: The extra Rs. 3,000 rent deduction is only for those who do not receive HRA. Unfortunately, since you do receive HRA (though only Rs. 500), you will be ineligble to use this deduction

SandeepShanbhag: I have answered this by saying that those who get HRA irrespective of the amount thereof cannot avail of sec. 80GG - deduction on rent paid

melathil thomas: Interest on amount gifted to spouse and made as FD is added to the donors income for the first year. What is the status of the principal amount on subsequent years?

SandeepShanbhag: the interest is always to be added each year. The principal amount is not to be added. The principal amount donated becomes a gift given by the spouse to the other spouse.

rodi: will CPF also be taxed

SandeepShanbhag: only recognized provident fund is being brought into the tax net partially - that too if annuity is bought using 60% of the proceeds, there will be no tax

rahul: How is this Budget 2016 going to impact the Real Estate industry?

SandeepShanbhag: There are a couple of good provisions for the real estate industry - key amongst them is that now Sec. 50C stamp duty value will be available on agreement to sell also if the date of agreement to sell and actual transfer date are separate

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