PPF is tax-free, only EPF `interest’ to attract tax: Finmin

The government on Tuesday seemed to step back from imposing tax on employees' provident fund, stating that only the interest that accrues on contributions to EPF after 1 April 2016 will attract income tax.

Reports quoting Revenue Secretary Hasmukh Adhia said Public Provident Fund, (PPF), which is a voluntary saving instrument, will not be taxed on withdrawal and only the interest that accrues on contributions to Employee Provident Fund (EPF) made after 1 April will be taxed while the principal, which is already tax-paid, will not be taxed again.

At the same time, Adhia said the Budget proposal to tax 60 per cent of Employees Provident Fund (EPF) withdrawal will affect less than one-fifth of employees with high salaries, meaning 60 per cent of the EPF corpus is taxable.

That, however, is yet to be clarified as taxing 60 per cent at the withdrawal stage could be a significant amount for the subscriber as it would be about 18 per cent of the total. This would mean that a retired employee will have to pay  a further Rs1.80 lakh as tax on an EPF corpus of Rs10 lakh, which is already tax-paid.

This will be double taxation for employees who subscribe either to the EPF or the National Pension Scheme.

Jaitley's move is aimed at bringing NPS on par with EPF, a long-standing demand of NPS subscribers.

The finance minister, however, thought of bringing parity by making both partially taxable - by making EPF taxable partially and making NPS tax-free partially.

In the NPS and other pension plans where the government has proposed to exempt 40 per cent of the corpus from tax at the time of withdrawal and at maturity, the investor has an option to convert the balance 60 per cent to an annuity plan to defer payment of tax and, in some cases, lowering of marginal rate of tax.

EPF enjoyed `Exempt, Exempt, Exempt' (EEE) status at the investment, earnings and withdrawal stages, and NPS was taxable at the time of withdrawal. Now with the proposed changes, EPF status changes to Taxable, exempt, Taxable (TET) as it is proposed to tax the investment stage also, ie, contribution by the employer if it exceeds Rs1.50 lakh per annum.