The government says that 60% of EPF corpus if invested in annuity, no tax is chargeable and salaried employees with monthly income up to Rs15,000 will be kept out of purview of the proposed taxation of EPF
The government’s effort to “bring greater parity in tax treatment of different types of pension plans” has led to immense confusion. The budget announced that 40% of the corpus withdrawn at retirement will be tax exempt for both the National Pension System (NPS) and Employee Provident Fund (EPF). The balance corpus withdrawn will be subject to tax. However, if the corpus is transferred to an annuity, it will be tax exempt. (Earlier, the entire 60% of the corpus withdrawn from NPS was taxable and the entire interest earned under EPF was tax-free). This has led to a backlash from EPF subscribers. Attempts to clarify the new norms have led to more confusion over the past 24 hours.
The National Pension System was unattractive because of taxation of the corpus withdrawn on retirement. While it was clear that 60% of the corpus withdrawn is subject to tax, how it will be taxed is still not clear. In order to make the NPS attractive compared to other schemes available, the new tax rule has been introduced. However, making EPF subject to tax led to a huge outcry and confusion on whether the entire 60% of the corpus will be taxed or only the interest component. Contributors to the Employee Provident Fund benefitted with the exempt-exempt-exempt or EEE status.
60% of EPF corpus if invested in annuity, no tax is chargeable
Revenue Secretary Hasmukh Adhia clarified that only the interest accrued on EPF contributions made after 1 April 2016 will come under the new proposal. Therefore, 40% of the interest accrued on contributions made after 1st April will be tax exempt and its remaining 60% will be taxed. This 60% will also be tax exempt if it is invested in pension annuity schemes, he added. This contradicts both the Finance Minister (FM)’s speech and the Finance Bill, which is quite clear about what the government intended to do.
A clarification issued by the Ministry of Finance states that, “It is expected that the employees of private companies will place the remaining 60% of the corpus in annuity, out of which they can get regular pension. When this 60% of the remaining corpus is invested in annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.” This contradicts what Adhia said that only interest will be subject to tax.
If 60% of EPF corpus is withdrawn, full amount subject to tax
A third source of confusion which came from Adhia was that only the interest component will be taxed. So if the above applies to EPF, will the same rule apply to NPS as well? Which means if only the interest component of EPF will be taxed, then will only the gains accrued on NPS contributions be subject to tax. Also, what happens to government employees?
The MoF clarifies that “if he (EPF subscriber) chooses not to put any amount in annuity product the tax would not be charged on 40%.” This means, the balance corpus would be taxed.
They further state, “We have received representations today from various sections suggesting that if the amount of 60% of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance Minister would be considering all these suggestions and taking a view on it in due course.”
Not applicable for those who are within the statutory wage limit of Rs15,000 per month
Adhia also mentioned that “Small salaried employees with up to Rs15,000 per month income will be kept out of purview of proposed taxation of EPF.” Surprisingly, this found no mention in the Budget speech or the Budget memorandum. The distinction would be made clear in the notification, he added.
The clarification issued by the MoF states that, “The main category of people for whom EPF scheme was created includes the members of EPFO who are within the statutory wage limit of Rs.15,000 per month. Out of around 3.7 crores contributing members of EPFO as on today, around three crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation. 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.”
There is still a lack of clarity on NPS. Since 40% is tax-free and 40% has to be annuitised, is the balance 20% taxable? There are still different interpretations and confusion on this.
From the Budget Speech
“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.”
From the Financial Bill
“It is further proposed to insert a new clause (12A) in the said section so as to provide that any payment from the National Pension System Trust to an employee on closure of account or his opting out of the pension scheme referred to in section 80CCD, to the extent it does not exceed forty per cent. of the total amount payable to him at the time of closure or his opting out of the scheme, shall be exempt from tax.”
While many were unclear whether these rule will apply to the Public Provident Fund (PPF) as well, the clarification stated that no part of PPF will be taxed. The questions that still need to be answered are:
1. Is government PF and PPF exempt?
2. Is 20% of NPS fully taxable, since 40% is tax-free and 40% has to be annuitised?