Budget ‘16: How is your EPF going to be taxed, and why is it bad news? Explained

Jaitley has announced that interest on 60% contribution to EPF will be taxed.
Budget ‘16: How is your EPF going to be taxed, and why is it bad news? Explained
Budget ‘16: How is your EPF going to be taxed, and why is it bad news? Explained
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A significant Budget announcement by the Union Finance Minister Arun Jaitley stating that that interest on 60% contribution to Employees’ Provident Fund scheme will be taxed has evoked strong reactions from workers and unions across the country. Though initially the understanding in the market was that the government has decided to tax accumulated EPF money, on Tuesday morning the ministry clarified that only the interest on 60% contribution to EPF will be taxed.

The reason being given for this is to simplify the schemes and bring them all on par, with other schemes like the National Pension Scheme.

Though initially experts said that the entire 60% would be taxed, the government on Tuesday clarified that only interest on 60% amount will be taxed. But many argue that even this move will be unwelcome.

MR Venkatesh, Chartered Accountant based out of Chennai said, "This is a sentimental issue. In a country with non-existent social security, it is unfair to tax people's savings after working after a life time. Even if it is tax on interest in the 60%, it won't be received very well. There are other ways for the government to raise funds."

“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,” G Sanjeeva Reddy, president, INTUC, and member of the Central Board of Trustees, Employees’ Provident Fund Organization, told Indian Express.

National Secretary Brijesh Upadhyay of Bharatiya Mazdoor Sangh, known to be close to the BJP has also expressed opposition, “This is like taxing the employee two times. We oppose the proposal, and we will take it up with 

First, what is the EPF scheme?

Every month, every employee puts 12% of their salary into the savings account, and the company puts 12% from their end. Companies can cap the amount for EPF at Rs. 1800 each.

EPF is compulsory, and the amount being deposited is exempt from tax at the time of deposit.

You get interest on the deposited amount every year, and that is not taxed either.

When you retire at 58, you can take it all out – and that’s tax free.

But Jaitley has now announced that interest on 60% contribution to EPF will be taxed at exit. The tax will be applied only for money deposited from April 1, 2016.

There will be no tax on the money withdrawn if it is being re-invested in annuity or pension products for earning regular income, according to Revenue Secretary Hasmukh Adhia.

Analysts say that this points to the government wanting to force employees to keep the money in pension products even after retirement. In effect, it is argued that this will encourage the salaried to keep the money saved in a pension scheme than spend it after retirement.

But Shashi Tharoor has a retort for it, he says, “People don't take out PF money to put it into an annuity, they take it out because they need it.” What he means is that when you withdraw your savings at retirement, you do it because you really need the money, for say buying a property to settle down, or say medical expenses. Is it fair to tax you then?

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