EPF: 60 percent tax on accrued interest only after April 1

The central government on Tuesday clarified that only that portion of the interest accrued on Employees Provident Fund (EPF) contributions made after April 1 will be taxed at 60 percent while the principal will continue to remain tax exempt.

Clarifying the position, Revenue Secretary Hasmukh Adhia said 40 percent of the interest accrued on contributions made after that date (April 1, 2016) will be tax-exempt. He also said the corpus won't be taxed on withdrawal.

The salaried class was shocked by Monday's budget proposal presented by Finance Minister Arun Jaitley that seemed to suggest that 60 percent of withdrawals from EPF acccounts would be taxed.

There also would be no change in the tax treatment of contributions to the Public Provident Fund (PPF), Adhia said.

Presenting the budget for 2016-17, Jaitley said 40 percent of the National Pension Scheme (NPS) corpus would be tax exempt at the time of withdrawal to make it attractive for savers. He said the annuity fund, which goes to legal heirs, also won't be taxable.

In case of superannuation funds and recognised provident funds, including EPF, the same norm of 40 percent of corpus to be tax free will apply in respect of corpus created out of contributions made on or from April 1.

He said the government was proposing the monetary limit for contribution of employer in recognised Provident and Superannuation Fund of Rs.150,000 per annum for taking tax benefit.

The service tax on single premium annuity policies had been reduced to 1.4 percent from 3.5 percent of the premium paid in certain cases.

Similarly, Jaitley also announced exemption of service tax for annuity services provided by NPS and services provided by Employees Provident Fund Organisation (EPFO).

The clarification from Adhia seems to have come due to the uproar against the government's proposal.

"The Finance Bill does not reflect Adhia's clarification. Perhaps the government may change the relevant provisions," Neha Malhotra, executive director, Nangia & Co, an international tax advisory and accounting firm, told IANS.