Union Budget 2016 and its impact on Retirement Plans

As per Budget 2016, EPF withdrawals will now come under the tax ambit. The same norm as National Pension System (NPS), will apply.

Supported by an argument about equality in different pension plans’ respective tax treatments, the Budget proposed that only 40% of the total accumulated corpus of all the contributions made by an employee on or after April 1, 2016—in a recognized provident fund (including EPF), NPS and superannuation fund—would be exempted from tax. This proposal is in sync with NPS, whereby it has been proposed that withdrawals up to 40% of the corpus at the time of retirement will be exempted from tax.

Further, Mr. Jaitley proposed that the annuity fund inherited by the legal heir after the pensioner’s death will not be taxed. He also proposed waiving off service tax from the Annuity services provided by the NPS and services provided by EPFO to employees. Reduction of service tax on Single premium Annuity (Insurance) Policies (3.5% to 1.4%) premium in certain cases has also been proposed. 

Till Budget 2016,EPF enjoyed ‘exempt’ status at the investment, accumulation as well as withdrawal stages, while the investment under NPS was taxable at the time when withdrawn. Now, with 40% tax exemption of the accumulated corpus under NPSthe Government has decided to align EPF and NPS and reduce the full tax benefit at the time of withdrawal. However, as per Budget 2016,EPF investments until March 31, 2016, will not attract any tax at the time of withdrawal.

 Some feel that with the proposed changes Government is discouraging the usual action of people opting for financial products solely based on tax benefits. Mumbai-based financial planner, Vishal Dhawan, says, “Tax should not be the determining criteria for investing. Parity among products on tax treatment will ensure that those who want to take the equity route can go for NPS, and conservative investors can go for EPF.”

EPF and EPS

12% of an employee’s basic salary goes towards his/her EPF account with the employer contributing equally. However, only 3.67% of the employer's contribution is actually diverted into the employee’s EPF, not the entire contribution amount. 8.33%, the balance of the employer’s monthly contribution, goes into the employee’s pension scheme (EPS).

The Government has proposed to pay this 8.33% for all new employees for the first three years of employment, towards which, a total of INR1,000 crore has been allocated.

Mr. Jaitley also proposed a monetary limit towards employer contribution in recognized Provident and Superannuation Fund for availing tax benefits–INR 1.5 lakh per annum.

The table below helps understand how much tax you will pay following Budget 2016’s EPF proposals. The figures are based on the assumptions that salary grows at an average of 5% year-on-year, tax is payable at a marginal rate, and the interest earned on EPF stands at an average rate of 8.5%.

 *All figures are in INR

Then and now

Until now, withdrawal of the EPF corpus after five continuous years of service was completely exempted from tax. However, according to Budget 2016 ifEPF is not utilized towards purchasing an annuity, 60% of that portion of the corpus, created from the employee contributions made with effect from April 1, 2016, would be taxable.

Under the current provisions, any payment from an approved superannuation fund that is made to an employee in lieu of/in commutation of an annuity, after a specified age, on retirement, or on becoming incapacitated prior to such retirement - is exempted from tax.

Not a welcome change

Budget 2016’sproposal to tax 60% of the provident fund corpus at the time of withdrawal on prospective basis, has evoked a strong opposition from the employees’ representatives on the Board of the Employees’ Provident Fund Organization (EPFO).

President, INTUC, and Member of the Central Board of Trustees, EPFO, GSanjeeva Reddy protested, “How can the government justify its decision to tax the accumulated EPF money when the employees have already paid tax on their income? This proposal will have to be taken back and we will send immediate representation on this to the Finance Minister. If they don’t roll it back, we will hold a nationwide strike.”

The Bharatiya Mazdoor Sangh expressed opposition as well. National Secretary, BMS, Brijesh Upadhyay, said, “This is like taxing the employee two times. We oppose the proposal, and we will take it up with the government.” In reply to the heightening concerns regarding the Budget 2016’s EPF proposals, Jayant Sinha, the Minister of State for Finance, tweeted a press note, clarifying the tax treatment for provident funds and NPS.

You may also like to read : Pension Scheme in India

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