EPF, PPF, NPS Withdrawal Tax – Government Clarifications

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Budget 2016 has created a 360º chaos as far as EPF, PPF and NPS withdrawal tax proposals are concerned. We had a series of clarifications from various concerned departments of the finance ministry today before we officially had one from Mr. Jayant Sinha, the Minister of State for Finance.

So, here is the eleven point clarification regarding the changes made in the tax treatment of EPF, PPF and NPS:

1. Thought behind this Proposal – The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.

2. 40% Withdrawal will be Tax Exempt – Towards this objective, the Government has announced that 40 per cent of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS.

3. Entire Corpus is Tax Exempt if 60% or more Corpus is invested for Buying Annuity – It is expected that the employees of private companies will place the remaining 60 per cent of the Corpus in Annuity, out of which they can get regular pension. When this 60 per cent of the remaining corpus is invested in annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.

4. Corpus is Tax Exempt in the Legal Heir’s Hands – The government in this Budget has also made another change which says that when the person investing in annuity dies and when the original corpus goes in the hands of his heirs, then again there will be no tax.

5. Idea behind this Mechanism – The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement.

6. A Large No. of Subscribers Remain Unaffected – The main category of people for whom EPF scheme was created are the members of EPFO who are within the statutory wage limit of Rs.15,000 per month. Out of around 3.7 crores 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.

7. Applicable only to Highly-Paid Employees in the Private Sector – However, in EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly-paid employees of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this. What we are saying is that such employee can withdraw without tax liability provided he contributes 60 per cent in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in Annuity product the tax would not be charged on 40 per cent.

8. PPF remains Unaffected – There is no change in the existing tax treatment of Public Provident Fund (PPF).

9. No Monetary Ceiling At Present – Currently there is no monetary ceilings on the employer contribution under EPF with only ceiling being that it would be 12 per cent of the salary of the employee member. Similarly, there is no monetary ceiling on the employer contribution under NPS, except that it would be 10 per cent of salary.

10. Monetary Ceilings Introduced – Now the Finance Bill 2016 provides that there would be monetary ceiling of Rs. 1.5 lakh on employer contribution considered with the ceiling of the 12 per cent rate of employer contribution, whichever is less.

11. Government Considering Suggestions – We have received representations today from various sections suggesting that if the amount of 60 per cent of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance Minister would be considering all these suggestions and taking a view on it in due course.

Please share you thoughts about any of these points or if you have any query regarding any of the proposals.

18 thoughts on “EPF, PPF, NPS Withdrawal Tax – Government Clarifications”

  1. You can withdraw only 50 per cent of your PF amount.

    More info@http://moneydial.com/you-can-withdraw-only-50-per-cent-of-your-pf-amount/

  2. This is a scheme whereby the Govt. thrusts a decision on the salaried class on the eve of their retirement. Probably, the annuity schemes with their meagre returns are not attracting investment. Hence this distasteful plan. The end result is that 60% of the retirement corpus is blocked in annuity schemes. God save the senior citizen who may need a lump sum amount for medical or family emergencies. As somebody wrote, the well-to-do have their lobbies and influences, the lower class has strong and militant unions, but the middle class being totally helpless is always the soft target for the governments.

    Hope Shivji may agree on some of my views at least.

  3. After getting several clarifications from different sources, the proposed main changes in EPF as i understand are given below:
    1. The contribution made from Apr 16, that too, employer`s portion is to be considered in calculating tax.
    2. 60% of the cumulative interest earned from contributions made from 01-04-2016 till withdrawal at retirement will be considered for tax.
    I here don`t understand whether this contribution is inclusive of interest earned from previous year or only fresh contribution by employer in a particular year.Which will lead more complication in calculation for year to year wef 01-04-2015 to withdrawal year at retirement.
    3. PPF is not affected on this proposal.

    4. No body talks on VPF ( Voluntary PF) or CPF ( Contributory PF) used by PUC.
    5. I have retired from service from PUC this year (2015-16) and had not withdrawn the PF as per the provision to keep it for next 3 yrs with same tax free interest payment at the time of withdrawal.
    In this case, we are not depositing any fund to the A/c, but interest is added till withdrawal within 3 years.
    Whether 60% this interest accrued added also to be taxed on withdrawal.
    Can any body help me , so that I can decide to withdraw within 2015-16 itself? Time is very short.

  4. The finance minister should not impose his personal views on salaried class. The purpose of EPF/PF/PPF in not only post retirement security in the form of pension as being made out by FM but to take care of other financial commitments like higher education of children, marriage of children and buying a house etc where one need large funds and salaried class depends on EPF/PF/PPF for these commitments. As there is speculation that FM may tax only interest portion, it means effective return would be around 6.5% less than what is being offered on tax free bonds at present. Then, why should any one put his hard earned money in EPF? Instead of providing any relief to salaried class in income tax, this FM wants to withdraw even existing benefits available to salaried class, which is worst and is a penalty on honest tax payers. It should be withdrawn completely.

    A very valid and fair suggestion given to Government by large number of people before budget to link the income tax limits like Re. 2.5 lakh, Rs. 5.0 Lakh and Rs. 10.0 Lakh with inflation has not been accepted, which would have avoided the speculation every year at budget time. Government wants tax payer to be honest but they themselves are not fair as these limits fixed a few years back have eroded their real value because of inflation.

  5. Hi shiv
    An excellent analysis and clear summary. Thanks. A few comments

    1 pension and pf reforms are long due so it is good to see Govt making bold attempts which fundamentally influences how people save long term. That brings predictability to the cash outflow from Govt kitty which is essential for any fund manager. I see Govt as the fund manger for pf.

    2. The fundamental reason why people withdraw pf amount after retirement is not marriage of kids (anyone at 60 would have grand kids now) but their lack of confidence in the returns they get from the Govt.

    3. There is no clear articulation of what Govt means by saying annuity scheme. There is no published annuity scheme from Govt that I am aware of. Please educate us if any exists.

    4. All the annuity schemes available today from private sector give less than 6% returns and hence not market competitive, and hence not able to attract investment in large quantities. Further the income from annuity is taxable.

    5. If these concerns needs to be addressed, the critical components that needs clarity are a) there is no tax while converting the corpus to annuity b) there is some visible or logical structure to the returns on that corpus – may be link the interest rate as same as the pf interest rate c) the income from annuity is made tax free.

    These will meet the Govt objective of turning the country into a pension society and address citizen concerns on taxability on retirement income.


  6. Do the new tax provisions apply to the contributions made in NPS from April 1 onwards or even to existing contributions? Thanks in advance!

  7. I will be surprised if the changes in Epf get passed.
    This should become a failed attempt so that they don’t even think of touching PPF or EPF.
    They don’t have any moral right to tax these till they get their house in order by removing corrupt practices and black money.
    It is not an intend to make it par with nps but they don’t want salaried class to get high tax free income as the present babus can’t get it.

  8. Hi,
    So it is a force by government to invest in pension security after retirement. And there is no clarify on what will be the rate of return for such pension schemes? What if I am not happy with return provided by government on pension schemes?
    The other perspective is – the government doesn’t want to return our money to me. And EPF has now become FORCED heredity plan, it is no longer retirement plan.
    I heard FM saying that they want India to become pension earning country. So government wants to give pension from our money only. So I feel it is a force by the government to invest in pension schemes or loot yourself by paying tax.
    Thanks a lot Mr. Modi. We never voted for such a forced by you. We never expected such things from you. Thanks again.
    Please revert back your decision and be people friendly.

  9. Thanks Shiv. I understand what they are trying something on line of Social Security for long term.But the use of PF mostly by retirees is on marriages and education of their kids. Enforcing it as a retirement income source is welcome but there is also a cultural aspect in India which has to change.PF is almost never used as a retirement corpus more of an investment for kids.
    Govt needs to market this is in a better way

    1. Hi Harinee,
      I agree with your views and probably this is the first move by the government to market it that way. This same government has introduced Sukanya Samriddhi Yojana for the purpose of the marriage and higher eductaion of the girl child and the scheme has been taken up with both hands by the investors. Do you think people will precisely use it for the girl child’s marriage and education? I don’t think so. It will be used as another good tax-free investment option.

      Many more such schemes have been introduced by this government – Atal Pension Yojana, PMJJBY, PMSBY, Health Insurance Scheme, NPS, Gold Bonds, Gold Monetisation Scheme, Skill India, Make in India etc., but people probably want free water, free electricity, free food, free money, free gas, free this and free that. This attitude results in the emergence of corrupt politicians. They never want to be self dependent and move forward for their bright future. I think we need to first change ourselves and then expect the government to change.

  10. Indian people are emotionally attached with Post Retirement benefits such as Gratuity & Provident fund. Merely an idea of taxing any of these scheme does not go down well with the people even if the scheme is good. It is suggested that this should be left to the free will of the people. However, they should come out with compulsory & consolidated a different social security scheme to cover up exigencies such as illness of all the dependent members of one’s family and retirement pension which passes on to one’s surviving spouse after one’s death

    1. Hi PK,
      I think no country in the world has as many defined benefit schemes as India has. The problem lies in their execution. Corrupt politicians and officers have been creating a mess out of all the good things here. India is a politically sensitive country. Politicians would do anything and everything to buy votes in the country and leave the government finances to the mercy of God.

      I think people here need to understand the maths of government finances. No doubt the government has made EPF unattractive, but they have made NPS equally attractive. Now, if you put both at par, I think NPS will earn you a better return in the long run as compared to EPF. But, it is difficult to remove anomalies here. So, let’s see how things go from here.

  11. They have over-complicated the entire system. While your post explains it very well, newspapers can’t go into so much detail. TV Channels want no clarity for TRP. Therefore, this is going to bite NDA in the back big-time. While intentions may be good, and a lot of it makes sense after I read your post, the emotional value of EPF in this country is high. To just hear the word tax on it will send people in a frenzy. People are yet to even understand the NPS which I think is a brilliant scheme backed by terrible marketing and education.

Leave a Reply

Your email address will not be published. Required fields are marked *