Budget 2016: PPF remains tax exempt; EPF interest post April 1 to be taxed

From 40%, public provident fund will now be 100% exempt. For EPF, the withdrawn amount would be totally tax exempt if it is re-invested in annuity pension products

Clearing the air on taxing provident fund withdrawals, the government said Tuesday PPF withdrawals will continue to be fully exempt from tax and only interest accruing after April 1 on 60% of the contributions made to Employee PF will be taxed.

All contributions and interest accrued to employee provident fund (EPF) before April 1, 2016, will not attract any tax on withdrawal. Withdrawal of principal amount contributed to EPF after April 1 would also remain exempt from any tax.

It is only the interest on contributions made after April 1, 2016 which will be taxed, Revenue Secretary Hasmukh Adhia told PTI in an interview here.

"There is no change in the status of public provident fund (PPF). EEE (tax exempt at the time of contribution, tax exempt on returns and tax exempt on withdrawals) scheme will continue for PPF," he said. "There is no 40% limit on PPF. It will be 100% exempt".

Adhia said out of the 3.7 crore active contributors in EPF, about 70 lakh corporate sector employees with high salary would be impacted by the proposed taxation of EPF interest on withdrawal.

"There are about 3 crore people whose monthly income is less than Rs 15,000. They are called eligible members of EPF. For this 3 crore people, there is going to be no change in status of taxation. They can withdraw their 100% corpus when they retire without any taxes," Adhia said, adding that the distinction would be made clear in the notification.

The Budget 2016-17 proposed to tax interest on 60% of EPF withdrawal. However, the withdrawn amount would be totally tax exempt if it is re-invested in annuity pension products.

"The purpose is not to mobilise revenue. We want people to move towards a pension society. So we have given another incentive wherein the investment in annuity product will be tax exempt. Annuity product was always taxable. But here, even after death of a person when the money is transferred to legal heir, we have made it tax exempt," Adhia explained.