Fixed Deposit — Tax on EPF withdrawal may not be all that bad, say experts
In order to bring about parity in New Pension Scheme and other retirement schemes, the government while announcing the Union Budget on Monday, decided to impose tax at the time of withdrawal on 60 percent of the contributions made after 1 April, 2016, to EPF and other schemes. The proposal has come as an unexpected shocker for the salaried class.
What the FM announced in Union Budget 2616: Finance Minister announced that EPF contributions made after 1 April 2016 will no longer be a part of EEE tax regime. As per the FM’s speech: “In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016.”
As per the new proposal, withdrawal up to 40% of the corpus at the time of retirement (58 years) will be tax exempt. In English that means, the amount of money that you get when you exit will be taxed, but it’s not as easy as it sounds. Firstly, whatever amount you have invest and the interest you earn till the age of 58 on that amount will continue to be tax free. But, any amount you invest after 1.04.16 the interest you earn on this amount will be taxed when you exit. So, going by the FMs proposal 40% of that corpus will be tax free, and out of the remaining 60%, only the accrued interest on the 60% contribution will be taxed, while the principal amount will remain tax exempt.
What’s the status now: Currently EPF falls under the EEE tax regime. Which means, the money you put (12% of salary) in the EFP account, and a matching contribution from your employer is tax free as per Section 80 C of the India Income Tax Act? Even the interest you earn is exempt from tax. And, finally when you turn 58 years old, you get your entire corpus (amount + interest earned) tax free. So, it’s EEE or Exempt, Exempt, Exempt tax regimen.
There is resistance and clarity is needed: Social media has already seen an outrage on this matter. And, those who aren’t outraged are demanding further clarity. Jayant Sinha, MoS Finance, said on Twitter, “We have noted concerns about changes in the tax treatment for EPF/PPF/NPS. Full clarification with FAQs will be issued shortly. In any case please recognize that we are only talking about prospective changes. Existing savings are not impacted in any way.”
What are the experts saying: Of course social media reactions are against the proposal, whose fine print is even out yet? Experts too are divided partially if not full on this matter. Pankaj Mathpal, Certified Financial Planner based out of Mumbai says, “It may seem like a bad move, but again it’s too early to say anything until the fine print comes. My guess is while 40% withdrawal is tax free, the investor might have to buy annuity with remaining 60% amount.” He isn’t the only one who thinks the annuity is a possibility.
Harsh Roongta, a Mumbai based Certified Financial Planner says, “I think the fine print may have a clause, where with the remaining 60% the investor will have to buy annuity on retirement. And, if that’s the case, a rough estimate will show that around 70–80% of people will not be affected. And, those who don’t want to buy into annuity, should pay the tax.” The truth is that most of us are not prepared for retirement. Mathpal says, “When the Fixed Deposit amount was available for withdrawal, many exhausted the corpus and were left with nothing for years to come. Bringing in an annuity would make sense.” Watch the above video for more Harsh Roongta’s elaborate views
Suresh Sadagopan, Mumbai based CFP says, “But assuming you don’t want to convert the 60% of the corpus on retirement into annuity, you will have to pay tax and to get your own money. If you need cash to say buy a house or put it in Fixed Deposit, the current proposal will defiantly hurt. This announcement regarding EPF in the budget seems like a retrograde move.”
What you should do: Seriously, what can you do? Common sense says wait for the fine print. Experts expect amendments will be made to the current announcements. If the current proposed EPF rules change there is a good possibility that NPS might turn out to be a better alternative, though it is not entirely a fixed return product. As of now, we suggest, keep tracking this space as we bring you more updates.