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After facing backlash on its Budget proposal to partially tax funds at the time of withdrawal from Employees’ Provident Fund (EPF), the finance ministry issued a clarification stating they are considering various demands on the issue including levying tax only on accumulated returns on the corpus and not on the contributed amount. Revenue Secretary Hasmukh Adhia said the finance minister would be considering all these suggestions and will take a view in due course.
Adhia said, “We have received representations today (Tuesday) from various sections suggesting that if the amount of 60 per cent 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 (National Pension System). The finance minister would be considering all these suggestions and taking a view on it in due course.”
PF Tax: Making Sense Of Govt’s Clarification
Adhia reiterated that no tax will be levied on withdrawal of 60 per cent of EPF corpus, if it is invested in annuity. He added that the ministry had also received demand from various groups for removal of proposed monetary ceiling of Rs 1.5 lakh on employer contribution or ceiling of 12 per cent of employer contribution, whichever is less and it is also being considered.
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Currently, there is no monetary ceiling on the employer contribution under EPF with the only ceiling being that it would be 12 per cent of the salary of the employee member. In his Budget speech for 2016-17 on Monday, Finance minister Arun Jaitley had proposed tax on 60 per cent of the corpus of provident fund at the time of withdrawal from EPF, in line with the NPS, and other pension plans where the government has proposed to exempt 40 per cent of the corpus from tax at the time of withdrawal.
The revenue secretary said the purpose of this reform is 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. The “original members” of EPFO, who are within the statutory wage limit of Rs 15,000 per month, totalling to around 3 crore subscribers out of around 3.7 crore contributing members, will not be impacted by this proposed change in taxation on withdrawal of corpus, Adhia said.
“It is only for that 70 lakh category people, about 3 crore people are not going to be affected, those who are original customers of EPFO. The big company employees joined later on, because there was no NPS at that time and because they joined, they rode on the benefit of smaller employees, and got complete EEE exemptions. This was the case. We are trying to say that ideally they should be a part of NPS, not EPF,” he added.
The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire corpus after retirement, Adhia said.
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