Budget 2016-17 surprise: EPF will now be partially taxable

To standardise all products, the FM introduced tax on EPF too

The changes announced by the finance minister Arun Jaitley in the Budget can reduce your retirement savings significantly when you withdraw it. The FM has made Employee Provident Fund (EFP) and National Pension Scheme (NPS) withdrawals on retirement partially taxable.

The EPF until now followed a exempt-exempt-exempt taxation structure. This means, there was no tax on investment, on interest accrued and on withdrawal. In case of NPS, the funds that you receive in your bank account was taxable.

“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 on or from April 1, 2016,” finance minister Arun Jaitley said in his Budget speech.

This essentially means when you withdraw from EPF, the 60 per cent of the corpus, accumulated post April 1,2016, will attract tax and the remaining 40 per cent will not. According to the current provisions of the NPS, out of the total corpus, the person needs to buy an annuity plan with the 40 per cent. Of the remaining money that he will get in his bank account, 60 per cent will be taxable.

For example, if a person has Rs 10 lakh corpus in the NPS on retirement, he will need to buy an annuity with Rs 4 lakh. Of the remaining Rs 6 lakh that comes to his bank account, 3.6 lakh will attract tax.

The move comes in to bring all retirement schemes at par with each other. The NPS scheme was taxable on maturity (on retirement), while the other products such as EPF were not. Due to this, many taxpayers, didn’t opt for the NPS despite being offered an additional deduction of Rs 50,000 on it under Section 80CCD (1B).