After the Budget proposed to tax 60% of an individual’s EPFO corpus at the time of withdrawal, salaried people across income levels have reacted with shock and anger.
After the Budget proposed to tax 60% of an individual’s EPFO corpus at the time of withdrawal, salaried people across income levels have reacted with shock and anger. Their reaction is justified as bulk withdrawal will be taxed at 30% and part of their retirement savings will be taken away in tax, which, until now, has been exempt at all stages.
Assuming that one starts with an EPF deposit of Rs 70,000 in year one and his 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.
The Budget proposed that if the employee purchases annuity with 60% of the corpus, then there will be no tax on that. However, it’s important to keep in mind most such products offer interest rates of 6-7% and returns are taxable. Until now, while EPF has been completely exempt from tax, subscribers of National Pension System (NPS) have to pay tax on withdrawal. After retirement, 40% of the accumulated money in the account had to be used to buy an annuity for pension and this money was not taxed at the time of the annuity purchase. The Budget has announced that 40% of the total corpus withdrawn at the time of final withdrawal from NPS will be taxed.
New entrants to the EPF will be the worst affected and it is not clear how an employee earning a pay of less than Rs 15,000 would be exempt from this provision as his salary will grow every year. Given the fact there is no robust social security system in the country, it is important that the government encourages investments in pension schemes.
Year 1 is the first year of contribution to EPF n The EPF contribution is R70,000 in year 1
The EPF contribution increases at the rate of 10% per year n 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