Tax Treatment on withdrawal for EPF and NPS in Budget 2016

Budget 2016-17 came out yesterday and there was some confusion when the Finance Minister mentioned that there will tax implication on EPF and NPS. In order to clarify these Finance Ministry came out with clarifications. You can find them below

(i) Objective of the change in tax regime was to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account post retirement.

(ii) To achieve this Govt. announced that only Forty Percent(40%) of the total corpus withdrawn at the time of retirement will be tax exempt both for recognized Provident Fund and NPS.

(iii) Though If a employee invests the remaining 60% Corpus in Annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.

(iv) Another change is to exempt transfer of Original Corpus from tax when it goes in the hand of heirs in case the person investing in Annuity dies.

(v) However, 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 For this category of people, amount at present can be withdrawn without any tax liability. This is being changed. What the govt says is that such employee can withdraw without any tax liability provided he contributes 60% in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in Annuity product the tax would not be charged on 40%.

(vi) Public Provident Fund (PPF) will be treated as earlier and there is no change in tax implication.

(vii) Currently there is no monetary ceilings on the employer contribution under EPF with only ceiling being that it would be 12% of the salary of the employee member. Similarly, there is no monetary ceiling on the employer contribution under NPS, except that it would be 10% of salary. Finance Bill 2016 has provision that there would be monetary ceiling of Rs1.5 lakh on employer contribution considered with the ceiling of the 12% rate of employer contribution, whichever is less.