Finmin clarifies on EPF withdrawals

After an outrage and confusion over the budget proposal to tax employee provident fund (EPF) withdrawal, the ministry of finance clarified on Tuesday that 60% corpus will be taxed only if withdrawn in lump sum instead of being invested in annuity after maturity.

The move was aimed to encourage private sector employees to go for pension security after retirement instead of withdrawing the entire money from the fund account.

Over the escalating widespread criticism, the government said that Finance Minister would consider suggestions being made and take a view on it in due course.

Finance minister Arun Jaitley in the budget speech on Monday had announced taxing 60% of the EPF corpus at the time of withdrawal, igniting widespread fury on social media platforms from the pension fund investors arguing that the BJP-led government was gnawing their retirement savings.

According to the proposal, 40% of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS. While the remaining 60% for the contributions made after April 1, 2016 will be taxed if not invested in an annuity scheme after retirement. However, there is no change in the existing tax treatment of Public Provident Fund (PPF), government clarified.

The government said 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.  On investment of 60% of the remaining corpus in annuity, no tax will be chargeable, making the entire corpus, tax free.

 “The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement,” finance ministry said in the clarification.

The move is aimed to bring parity between EPF and National Pension Scheme (NPS), under which withdrawals were taxed till recently, making them uncompetitive among investors.

“I propose to make withdrawal up to 40 per cent of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognised provident funds, including EPF, the same norm of 40 per cent of corpus to be tax free will apply in respect of corpus created out of contributions made after April 1, 2016.", Jaitley said in his Budget speech on Monday.

Government received representations today from various sections suggesting the tax be levied only on accumulated returns on the corpus and not on the contributed amount, if 60% of corpus is not invested in the annuity products. It also received representations asking for not having any monetary limit on the employer contribution under EPF as such a limit was not there in NPS. “The Finance Minister would be considering all these suggestions and taking a view on it in due course,” the government said in a statement.

Besides, the proposal suggests that when the person investing in Annuity dies, no tax will be levied when it is transferred to the heirs.

The budget also proposed a monetary ceiling of Rs 1.5 lakh on employer contribution with a ceiling of 12% rate of employer contribution, whichever is less. Currently there is no monetary ceiling but only that of 12% of the salary of the employee member in case of EPF and 10% in case of NPS.

The finance ministry in the clarification also pointed out that there will be no tax on withdrawal for EPFO members that fall within the statutory wage limit of Rs.15,000 per month.  “Out of around 3.7 crore contributing members of EPFO as on today, around 3 crore subscribers are in this category.  For this category of people, there is not going to be any change in the new dispensation,” the statement said.