1. EPF tax row: All you need to know about retirement schemes

EPF tax row: All you need to know about retirement schemes

As the government is under pressure to withdraw the proposal to tax 60 per cent of Employees Provident Fund, we take a look at what the three major retirement schemes - EPF, Public Provident Fund and National Pension Scheme - offer.

By: | Updated: March 3, 2016 5:22 PM
Budget 2016, Budget news, Budget latest news, budget 2016 expectations, Budget expectations, budget session 2016, budget 2016 date, arun jaitley Provident fund tax row: As the government is under pressure to withdraw the proposal to tax 60 per cent of Employees Provident Fund, the debate must have raised curiosity on retirements products available in the country. (Thinkstock)(Thinkstock)

Controversy is raging over the government’s Budget 2016-17 proposal to tax 60 per cent of Employees Provident Fund corpus on contributions made after April 1, 2016. As the government is under pressure to withdraw the provision, the debate must have raised curiosity on retirements products available in the country.

Against this backdrop, we look at what the three major retirement schemes – EPF, Public Provident Fund and National Pension Scheme – have on offer for you. While EPF is run by the Employees’ Provident Fund Organisation (EPFO), the other old-age income security scheme – the Public Provident Fund (PPF) – is sponsored by the government and the National Pension Scheme is sponsored by the Pension Fund Regulatory and Development Authority (PFRDA).

While EPF and PPF have been around for a while, the NPS has been a recent entrant and a slow-starter. However, NPS is likely to pick up steam with Finance Minister Arun Jaitley providing tax benefits at withdrawal with the long-term aim to bring parity on the taxation front with EPF.

PPF, however, remains totally exempted throughout its period. For PPF, at 8.7 per cent annual rate of interest, the Economic Survey pointed out that after factoring in tax rate on deposit and interest, the effective interest rate actually comes to a high 16 per cent.

VIDEO |  PF Tax: Making Sense Of Govt’s Clarification

The NPS, which has been a late starter in the retirement fund race, offers market-linked returns with a maximum equity investment of 50 per cent from subscriber money permitted under the scheme, providing a window to beat returns from PPF and EPF in the long run. However, there are risks associated to this. The scheme also offers a 100 per cent debt option for the risk-averse investors. The scheme,where subscribers have the option to choose from 8 fund managers, has one of the lowest costs associated with it.

We list out some of the main highlights of the three schemes – EPF, PPF and NPS- as a ready-reckoner for you.

EMPLOYEES PROVIDENT FUND SCHEME (EPF)

Eligibility: Employees drawing basic salary of Rs 15,000 have to compulsory contribute to the Provident fund and employees drawing above Rs 15,000 have an option to become member of the Provident Fund

Where to open: Scheme is provided by Employees’ Provident Fund Organisation (EPFO) through organisation enrolled with it. Your office will open the account for you if they employ 20 persons or more

Investment limit: Employee contributes 12 per cent of basic salary and and equivalent amount is contributed by the Employer.

Returns: EPF funds will earn a 8.8 per cent for 2015-16, marginally up from the previous 8.75 per cent.

Duration/maturity: Till the retirement of the employee or the employee opting out of

Loans/Withdrawals: You can withdraw from EPF account for children’s education, marriage of self, children and siblings, purchase/construction of a house or any medical emergencies. However, withdrawal is subject to certain conditions:

• Minimum 7 years of service;
• Maximum 3 withdrawals during which you hold the EPF sAccount;
• Maximum aggregate withdrawal would be 50% of the total contributions made by you.

For medical emergencies, there is no minimum service period. However, the maximum amount one can withdraw is 6 times the basic salary and proof of hospitalisation is required.

However, withdrawal for purchase/construction of house is available only once in an individual’s working life. The minimum service period is 5 years and the maximum withdrawable amount is 36 times your total salary (for construction of property) and 24 times (for purchase of property).

Tax Benefits: Currently enjoys the Exempt, Exempt, Exempt (EEE) status. However, Budget 2016-17 has stoked a massive controversy by proposing that has proposed that only 40 per cent of the contributions made to EPF after April 1, 2016, will be tax-free on withdrawal. With widespread opposition to the move, the government is likely to reconsider its decision and a final word is awaited.

Nomination: Subscriber can nominate one or more person belonging to his family. If he has no family he can nominate any person or persons of his choice but if he subsequently acquires family, such nomination becomes invalid and he will have to make a fresh nomination of one or more persons belonging to his family. You cannot make your brother your nominee as per the Acts.

Transfer of Account: Account is transferable with change of change of job of subscriber

PUBLIC PROVIDENT FUND (PPF)

Eligibility: Individuals can open account in their name, also open another account on behalf of a minor. Joint/NRI/HUF accounts cannot be opened.

Where to open: Post offices, public sector banks and few private banks offer the government-run scheme.

Investment Limit: Minimum Rs 500 with a cap of Rs 1.5 lakhs per annum. Deposits can be made in one lump-sum or in 12 installments per year.

Interest Rate/Returns: 8.7 per annum with effect from April 1, 2015. Interest is paid on March 31 every year. Interest calculated on monthly basis on the minimum balance between 5th and last day of the month.

Scheme Duration: 15 years with the provision to extend in one or more blocks of 5 years each. Premature closure is not allowed before 15 years.

Loans/withdrawals: Available from third financial year. Part withdrawal is permitted from 7th Financial Year

Taxation: PPF comes under the Exempt, Exempt and Exempt (EEE) category which makes it tax exempt from investment till maturity. Subscription qualifies for tax benefits under 80C of Income Tax Act.

Nomination: One or more persons can be nominated

Transfer of Account: The PPF account can be transferred free of charge to another branch, another bank or post office.

NATIONAL PENSION SCHEME (NPS)

Eligibility: All citizens between 18 and 60 years as on the date of submission of application

Where to open: Authorised Points of Presence (POP) and almost all private and public sector banks apart from several other financial institutions offer the scheme.

Investment limit: (For Tier-1 non-withdrawable) minimum Contributions is Rs 500 with a total minimum contribution per year at Rs 6,000. For Tier-II (withdrawable) minimum contributions Rs 250 with minimum balance of Rs 2000. No cap on maximum investment.

Returns: NPS offers market-linked returns. Being a defined contribution scheme where subscribers contribute to his account, there is no defined benefit that would be available at the time of maturity. The accumulated wealth depends on the contributions made and the income generated from investment of such wealth.

Duration/maturity: Maturity of scheme is at age 60

Loans/Withdrawals: On retirement, a subscriber can opt out of NPS. However, the subscriber would be required to invest minimum 40 per cent of the accumulated savings to purchase a life annuity, while remaining can be taken out a lump-sum.

Tax Benefits: Tier-I account is exempt, exempt, taxed (EET). The amount contributed is entitled for deduction from gross total income upto Rs 1 lakh (along with other prescribed investments) as per section 80C of the Income Tax Act.

The Union Budget 2016-17 has proposed that 40% of retirement corpus of a subscriber of National Pension Scheme (NPS) at the time of retirement will be tax exempt. Further, annuity payment to the legal heir after the death of pensioner has been made exempt from tax.

Nomination: In the event of death of the subscriber, the nominee can receive 100 per cent of the NPS pension wealth in lump sum.

Transfer of Account: Provides full portability within geographies and between POPs

  1. G
    G S
    Mar 4, 2016 at 6:54 am
    This government is only taxing the people who are already paying tax. They should find ways how to tax the others who are still not paying any tax but earning huge amounts
    Reply
    1. J
      Joseph Simon
      Mar 2, 2016 at 11:28 am
      The basic purpose of EPF is for the large private employees to have a sizeable amount at the end of their service and it should be left to them to decide how they use it for their family or invest in pension fund, which was not available when EPF was introduced, now since there is many options, it should be left to them to decide, when they can decide whom to Vote, they know better how to utilise their hard earned money.Stop looting / haring the ried people as they are the one who pays the tax
      Reply
      1. M
        Manish
        Mar 2, 2016 at 6:20 pm
        I believed in Modi wheartedly in LS elections and voted for nalayak candidate of BJP. Voted for nalayak BJP candidate even in state embly elections... But with this EPF tax decision, I am now a hardcore anti-BJP voter...an I will turn 50 others to be anti-BJP voter. What Congress and Rahul-baba couldn't do in all these years, Jaitley has done in one day... Make a huge dent in BJP vote bank From this date till my retirement, I am not going to vote for BJP in ANY election. Period. Instead of squeezing current 3% tax payers, Govt should find ways to bring in 6% people in income tax net and reduce burden for those 6%. Dear FM, please bring shopkeepers in tax net. Even a small kirana-wala makes lot of money and never pays any tax.
        Reply
        1. R
          Ramanan
          Mar 2, 2016 at 8:36 am
          I agree with FM to impose Tax On EPF. Before that he should recover all the NPA of the all banks. Why he allowing Banks to written of the NPA. Govt. providing amnesty to NPA and crushing the ried people. This is not fare.
          Reply
          1. s
            s.n.sharma
            Mar 2, 2016 at 11:22 am
            Taxation on EPF is totally crime with employee. EPF is corpus of life long saving of employee. they have already paid tax on contributed amount. EPF is for surviving in old age,(if not done, then sun/daughter marriage, construction house etc) not for earning from share market or greedy instrument. I request kindly do justice with employee
            Reply
            1. S
              seshadri
              Mar 2, 2016 at 4:12 pm
              fisrt mr arun jaitley should file a fir in police station to arrest fraud people like vijay malaya
              Reply
              1. S
                seshadri
                Mar 2, 2016 at 4:11 pm
                i support your comment
                Reply
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