How much EPF tax on withdrawal you may have to pay: After the Arun Jaitley’s Budget 2016 proposal to tax 60% of an individual’s Employees’ Provident Fund (EPF) corpus at the time of withdrawal, salaried people across income levels have reacted with shock and anger. Their reaction is well justified as bulk withdrawal will be taxed at 30% rate and part of their retirement savings will be taken away in tax, which, till now, has been exempt from tax at all stages. New entrants to the EPF will be the worst affected as the new rule will not apply to EPF balance accumulated till April 2016.
There is no clarity whether the entire 60% of the corpus at the time of withdrawal will be taxed or just 60% of the interest earned after April this year will be taxed. Assuming that one starts EPF deposit of Rs 70,000 on year one and one’s contribution increases by 10% every year for the next 20 years and the rate of interest is 8.8% every year, then the total accumulated EPF balance will be Rs 84.11 lakh. If 60% of the corpus is taxed at withdrawal, then the individual will have to pay tax on Rs 50.46 lakh. If only 60% of the interest earned on total contribution is taxed at withdrawal, then the tax amount will be Rs 26.4 lakh.
The Budget proposed that if the employee purchases annuity with 60% of the corpus, then there will be no tax imposition. However, it’s important to keep in mind most annuity products of life insurance companies offer interest rates of 6-7% and the returns are taxable.
1 Year 1 is the first year of contribution to EPF
2 The EPF contribution is Rs 70,000 in year 1
3 The EPF contribution increases at the rate of 10% per year
4 Interest earned on EPF is 8.8% per year throughout
Note: If the employee purchases annuity from the entire EPF proceeds, it would not trigger taxability