Alarmed Government Clarifies Tax Treatment for Provident Fund

To clear the air around the tax treatment of recognised Provident Fund, government has abruptly come out and clarified about the treatment. As per release of ministry of finance, there seems to be some amount of lack of understanding about the changes made in the general budget 2016-17 in the tax treatment for recognised Provident Fund & NPS.  “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,” release said. For the same government has announced that forty per cent (40%) of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS. 

Government hoped that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% 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. 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. “The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement,” release quoted. 

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. 

On the other hand 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 For this category of people, amount at present can be withdrawn without any tax liability.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% 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%,” Finance Ministry clarified.