60% EPF will now be taxable on maturity- Business News
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60% EPF will be taxable on maturity

While NPS has been made attractive, the finance minster has also proposed to bring tax treatment of defined benefit and defined contribution pension plans at par.

  • February 29, 2016  
  • |  
  • UPDATED   18:40 IST

Finance Minister Arun Jaitley has proposed to make withdrawals from NPS on maturity to the extent of 40% of the corpus tax exempt. At the moment, NPS subscribers have to compulsorily buy an annuity for at least 40 per cent of the accumulated corpus with an option to withdraw the remaining sum. The withdrawal sum was taxed as per the applicable income tax slab rate.

While NPS has been made attractive, the finance minster has also proposed to bring tax treatment of defined benefit and defined contribution pension plans at par.  For contributions made after 1.4.2016, EPF and superannuation funds will also follow the same norm of 40% of maturity amount to be tax free. In other words, 60% of the corpus will be taxed, which was earlier completely tax-free.

According to Mr.Anil Lobo, India Business Leader for Retirement, Mercer India," Though this is with an intention to encourage regular cash flow of post retirement income, it would however be a deterrent for wealth creation under recognized provident Fund as Provident fund withdrawals were hitherto tax free." 

So according to new guidelines proposed in the budget employee's PF contribution made on or after April 01, 2016, any withdrawal after rendering a continuous service of 5 years or more (or subject to fulfillment of certain other prescribed conditions), only 40% of such accumulated balance of employee's share of provident fund contribution and interest would be exempt from tax.

In order to incentivize employers to recruit unemployed people, Finance Minister Mr. Jaitley has also said in his budget speech that Government of India will pay the employer's share of 8.33% towards Employee Pension Scheme for all new employees for the first three years of their employment. This will apply to those with salary of upto Rs 15,000 per month.  Mr. Jaitley has made a provision of Rs 1000 crore for this scheme.

Lobo, says,""Tax benefits should give impetus to individuals to join the NPS scheme, thereby helping enhance coverage, adequacy and sustainability of India's overall retirement system." Further, the annuity fund which goes to the legal heir after the death of pensioner will not be taxable. Finance minister removes service tax on annuity services provided by NPS and services provided by EPFO to employees. Further, he has also proposed to reduce service tax on Single premium Annuity (Insurance) Policies from 3.5% to 1.4% of the premium paid

Rajesh Sud, Executive Vice Chairman & Managing Director, Max Life Insurance, says, "The New Pension Scheme has been made more attractive through EEE tax exemption and reduction in service tax on annuity services. In another step to promote pension sector, annuity in the hands of annuitants will be tax exempt and service tax on single premium annuity schemes has been reduced from 3.5% to 1.5%."