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Provident Fund Withdrawals to be Taxed in Big Setback for Salaried Class

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Provident Fund Withdrawals to be Taxed in Big Setback for Salaried Class
Finance Minister Arun Jaitley's Budget 2016 proposes to tax a big chunk of Employee Provident Fund (EPF) withdrawals from April 1, 2016, a move that will disappoint nearly six crore people.

The sting is buried on page 28 of today's budget, under the title - "Measures for moving towards a pensioned society".

"In case of superannuation funds and recognized 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 1.4.2016," said Finance Minister Arun Jaitley while presenting the Budget in Parliament.

Currently, withdrawals from Employee Provident Fund are completely exempt from income tax after five years of continuous service, but after April 1, employees will have to pay income tax on 60 per cent of the amount they withdraw from the fund. The remaining 40 per cent will be tax free, experts told NDTV Profit.

The tax on EPF withdrawal will be charged according to tax slab of employees, analysts said.

Revenue secretary Hasmukh Adhia however after the Budget clarified that there would be no tax on the remaining 60 per cent if it is invested in annuity (pension) products for earning regular income. The secretary also mentioned that the remaining 60 per cent if transferred to the heir, after the employee's death, then that will remain tax free.

Explaining the move to tax PF withdrawal, Minister of State for Finance Jayant Sinha told NDTV, "If you take out the 60 per cent and want to consume it in one year, you will have to pay tax because effectively you are defeating the purpose of the pension scheme." Congress lawmaker Shashi Tharoor countered the minister. "People don't take out PF money to put it into an annuity, they take it out because they need it," he said.

Analysts said that this step is aimed at encouraging the salaried to remain invested in the retirement fund and later invest the kitty in annuity (pension) products to earn regular income.

The finance minister also announced that similar terms on withdrawal will apply to the New Pension Scheme or NPS. This means that withdrawals from the NPS, which come under the ambit of income tax, will now be partially tax free. So, 60 per cent of NPS withdrawal will be taxed, while the remaining will be tax free from April 1, 2016; currently 100 per cent of the sum withdrawn from NPS is taxed.

"This has been done with the aim of aligning the tax treatment of long-term retirement products... it will be applicable to contributions made after 1 April 2016," said Parizad Sirwalla, National Head-Global Mobility Services-Tax, KPMG.

The Employees' Provident Fund Organisation or EPFO manages a corpus of around Rs 6.5 lakh crore with a subscribers base of around six crore.


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