A shocking EPF tax rule that specifically targeted the middle class, triggered frantic and contradictory clarifications making things more and more confusing just a day after the Union Budget 2016
On 29th February, Finance Minister Arun Jaitley, presented what is thought to be a mediocre Budget. However, for the salaried middle class, working in the private sector, the budget came as a rude shock. The finance minister in his budget speech announced that in order to bring parity in the pension system 40% of the corpus withdrawn at retirement will be tax exempt for both the National Pension System (NPS) and Employee Provident Fund (EPF). This meant that 60% of the EPF corpus, which is now tax exempt, will be taxed. This led to an uproar from the middle class demanding a roll back. An online petition demanding the withdrawal of the taxation of the EPF corpus soon went viral on social media. The petition now has over 65,000 supporters.
It wasn’t long before the clarifications upon clarifications, leading to multiple flip-flops started. After these contradictory statements, a news reports stated that the government may consider a roll back. Here is how things unfolded.
Timeline of Flip-flops
29th February: Budget
““In case of superannuation funds and recognized 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 1 April 2016.”
This led to a furore after the budget.
29 February 9:10 pm Jayant Sinha confuses people that all pension funds (including PPF) will be taxed
“The principal amount will not be taxed and will continue to remain tax exempt on withdrawal. What we have said is 40 per cent of the interest accrued on contributions made after April 1 will be tax exempt and its remaining 60 per cent will be taxed.”
“It (the tax that we are proposing on withdrawal of the remaining 60% of the accumulated amount) will be only on the interest component and not on the principal. If a change has to be made in the finance bill, then we will do it to clarify that the entire corpus will not be taxed but only the accumulated return component,” he said.
“It is not done with a view to tax the middle class and not meant for revenue mobilisation. All the private sector employees prefer to put their money into EPF because it is an EEE (exempt exempt exempt) scheme. They withdraw the whole corpus at the time of retirement because it is not taxable and do not put in money for their pension security,” he said.
Same day 3.16 pm PIB release—Clarifications from the Finance Ministry
Says nothing about only interest being taxable
“Towards this objective, the Government has announced that Forty Percent (40%) of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS.
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. We are changing this. What we are saying is that such employee can withdraw without 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%.”
Same day 3.34pm Jayant Sinha, Minister of State, tweets 11 point clarification. Says nothing about only interest being taxable
Same day 7.06pm PTI News—Government to consider rollback:
“Under all-round attack, the government today promised to consider demands for a rollback of the proposal to tax 60 per cent of withdrawals from provident fund and a ceiling on employers’ contribution but made it clear that PPF will continue to be exempt from tax.
Revenue Secretary Hashmukh Adhia went a step further to say that only 60 per cent of interest on contributions made after April 1 will be taxed and that the principal amount of contribution will remain untouched at the time of withdrawal.”