Taxing EPF: 11 clarifications only added to the confusion; trade unions strike on 10 March

The drama around EPF doesn't seem to end.

Here's how it unfolded. In the Union Budget on Monday, finance minister Arun Jaitley announced that EPF contributions made after 1 April 2016 will no longer be a part of EEE tax regime, that is exempt from tax at the time of investing, accrual and also withdrawal. As per the budget speech: "In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus created out of contributions made after 1.4.2016."

The proposal resulted in outrage. It was confusing. While some said that though withdrawal of 40% was tax free, the entire remaining corpus of 60% was taxable. Which means, amount you invested after 1 April 2016 as well as the interest you earned on such amount will be taxed.

By afternoon, a clarification was given by revenue Secretary Hasmukh Adhia that only interest accrued on 60% of the contributions to the EPF will be taxed while the principal amount will remain tax exempt.

By evening Jayant Sinha, Union Minister of State for Finance. tweeted out a document with "clarification about changes made in the Tax Treatment for Recognised Provident Fund & National Pension System (NPS).

Though most experts are unanimous in saying that the tax will be on the entire principal and interest, the latest clarification has created more confusion. The simple reason is that the government has not yet said that what Adhia said earlier in the day was wrong.

So why is the government being squeamish about the issue? The government flip-flop is creating bigger confusion.

Here are the 11-point clarification the government has issued and the confusion the clarification has created (in brackets):

(i) The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.

(Confusion: Whom does the money belong to? If it belongs to the employee why is he being discouraged to withdraw his own money by changing tax rule around EPF?)

(ii) Towards this objective, the government has announced that Forty Percent (40%) of the total corpus withdrawn at the time of retirement will be tax exempt both under recognised Provident Fund and NPS.

(No confusion)

(iii) It is expected that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% of the remaining Corpus is invested in Annuity, no tax is chargeable. So what it means is that the entire corpus will be tax free, if invested in annuity.

(Confusion: So what does "the entire corpus" mean? Does this include the principal as well as the interest earned? If it indeed includes principal, why did Adhia make such a statement?)

(iv) The Government in this Budget has also made another change which says that when the person investing in Annuity dies and when the original Corpus goes in the hands of his heirs, then again there will be no tax.

(No confusion)

(v) The idea behind this mechanism is to encourage people to invest in pension products rather than withdraw and use the entire Corpus after retirement.

(Confusion: Whom does the money belong to? If it belongs to the employee why is he being discouraged to withdraw his own money by changing tax rule around EPF)

(vi) The main category of people for whom EPF scheme was created are the members of EPFO who are within the statutory wage limit of Rs 15,000 per month. Out of around 3.7 crores contributing members of EPFO as on today, around 3 crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation.

(No confusion)

(vii) However, in EPFO, there are about 60 lakh contributing members who have accepted EPF voluntarily and they are highly - paid employees of private sector companies. For this category of people, amount at present can be withdrawn without any tax liability. We are changing this. What we are saying is that such employee can withdraw without tax liability provided he contributes 60% in annuity product so that pension security can be created for him according to his earning level. However, if he chooses not to put any amount in Annuity product the tax would not be charged on 40%.

(Confusion: Is this 60% amount subjected to tax include the principal as well as the interest earned? Or is it only for interest earned.)

(viii) There is no change in the existing tax treatment of Public Provident Fund (PPF).

(No confusion)

(ix) Currently there is no monetary ceilings on the employer contribution under EPF with only ceiling being that it would be 12% of the salary of the employee member. Similarly, there is no monetary ceiling on the employer contribution under NPS, except that it would be 10% of salary.

(No confusion)

(x) Now the Finance Bill 2016 provides that there would be monetary ceiling of Rs1.5 lakh on employer contribution considered with the ceiling of the 12% rate of employer contribution, whichever is less.

(No confusion)

(xi) We have received representations today from various sections suggesting that if the amount of 60% of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS. The Finance Minister would be considering all these suggestions and taking a view on it in due course.

(Confusion: So nothing is final. When will the government come clean on this please? The simple question is this: will our principal be taxed or only interest?)

Meanwhile, PTI has reported that central trade unions, including the RSS-backed Bharatiya Mazdoor Sangh (BMS), have opposed the proposal terming it as "an attack on the working class and a clear case of double taxation". They are planning a nationwide agitation on 10 March.


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