Govt blinks on EPF, says only interest on 60% contribution to be taxed

The move to tax 60% of contributions effective April 1, 2016, had been roundly criticised since it would affect all salaried individuals

Facing a virtual revolt from the taxpaying middle class over a Budget proposal to tax 60% of EPF contributions, Revenue Secretary Hasmukh Adhia on Tuesday was quoted by CNBC-TV18 news channel as saying that only the interest accrued on EPF would be taxable at the time of withdrawal. 
 
Adhia also clarified that the new tax scheme would not apply to Public Provident Fund schemes (PPF). 
On Monday, Finance Minister Arun Jaitley had announced that as much as 60% of Employee Provident Fund would be subject to tax, including on the principal. The move was met with dismay across the salaried classes, for many of whom the EPF is often the lone tax-saving financial tool.  The Finance Minister had made only 40% of the withdrawal tax-free at both entry and exit stages.

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Until now, EPF savings were EEE, or triple-exempt, meaning that the contribution was exempt, as was the interest and the total corpus at the time of withdrawal. In contrast, the NPS was EET or exempt-exempt-tax. 

The move as aimed at bringing parity in tax treatment of various pension plans, and would have be levied in contributions made on or after April 1, 2016 by employees participating in a recognised provident fund and superannuation fund.  
 

The move immediately prompted a backlash from employed individuals, since the EPF barely earns enough money to beat inflation. The EPF typically invests only in government securities, which are safe investments but have one of the worst rates of return. This effectively means that by the time an employee retires, the money he has in hand has roughly the same purchasing power at the time of saving.

Minister of State for Finance Jayant Sinha later added to the confusion when he said that the new tax regime would apply to all retirement schemes, such as the National Pension Scheme and PPF. The finance ministry then clarified that if the remaining 60% of the corpus was not withdrawn and put in an annuity plan instead, it would not be taxed.