Govt. Clarifies EPF Provision: Only The Interest Will Be Taxed, Not The Principal Amount
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After outrage on Arun Jaitely announcement stating to tax 60% of the provident fund corpus at the time of withdrawal, Revenue Secretary Hasmukh Adhia clarified today that “Only interest accrued on 60 per cent contribution to EPF after April 1, 2016 will be taxed; principal amount to remain tax exempt”. Also ” PPF contributions will continue to be tax exempt; no tax on withdrawal and small salaried employees with up to Rs 15,000/month income will be kept out of purview of proposed taxation of EPF” he said.
Jaitley’s announcement brought the EPF, which is a major tax-free savings option for many workers, in line with the National Pension Scheme and other pension plans, where the government has proposed a tax exemption on 40% of the corpus on withdrawal.
Everything You Need To Know About EPF(Employee Provident Fund):
What is EPF and who governs it?
Employee Provident Fund (EPF) is one of the main platforms of savings in India as well as post retirement scheme for nearly all people working in Private sector Organizations. Three major financial retirement schemes are Employee Provident Fund(EPF), Employee Pension Scheme(EPS), Employees Deposit Linked Insurance Scheme (EDLIS). How the contributions are calculated is based on basic salary and dearness allowance. A person starts to contribute to these funds when they start working on a regular basis (monthly in most cases). Its purpose is to help employees save a portion of their salary every month so that the funds can be used when a person is no longer able to work or post retirement. Employee Provident Fund (EPF) is managed by the Employees Provident Fund Organization (EPFO) of India. EPFO has launched a Universal Account Number (UAN) driven Member Portal to provide a number of facilities to its members through a single window without having to jump through various account numbers every time they change jobs. Employees’ Pension Scheme (EPS) of 1995 offers pension on disablement, widow pension, and pension for nominees. Under the EDLI scheme, life insurance cover is provided to the PF members. The cost of the scheme is borne by the employer and life insurance cover offered is just Rs 60,000.
Who can and cannot contribute to EPF?
For those who have a basic salary of up to Rs 15000 (Till September 1, 2014, the amount was Rs 6500) contributing to the EPF is mandatory. Contributions are voluntary for those whose basic salary exceeds Rs 15000. However, it is strongly suggested that an EPF account be maintained as it provides various benefits.
What are the provisions for dormant accounts?
The EPF account changes will be implemented from April 1, 2016. All dormant accounts will now have an interest rate of 8.8% as well. At present dormant accounts don’t earn any interest rates. However, the notification is silent when if an employee has ceased working and has not attained the age of 58 years. “It can be said that dormant accounts will continue to earn interest till the EPF account-holder attains 58 years and is allowed to withdraw the funds entirely. However, a clarification on this aspect from the PF department will be helpful,” says Parizad Sirwalla, tax partner and head, global mobility services at KPMG (India).
Certain restrictions have also been introduced when it comes to early withdrawal. Before 1 year of retirement, an employee may withdraw 90% of his account balance. However an advance withdrawal EPF account is available for specific purposes such as the purchase of a house, medical treatment of self or family, child’s education or marriage. An option for changing EPF accounts to NPS (New Pension scheme) is being mulled by the government to provide for flexibility in order to avail various benefits across these two schemes for employees. EPFO’s advisory body FAIC had recommended that 8.95 percent rate of interest on PF deposits for 2015-16 was feasible as it would leave a surplus of Rs 91 crore.
EPF is the only saving for anyone working considered to be safe, secure and tax-free as they already pay tax on their salaries. The employee should be entitled to get his EPF hassle free and without tax. We hope Government keeps employee welfare in mind when such rules are applied.