Despite a clarification from the finance ministry, confusion reigns over the tax-ation of provident fund corpus. The finance ministry clarified on Tuesday that 60% of the contributions made from April 1, 2016 and the interest they earn will be taxed at the time of withdrawal. This has quelled speculation in the me-dia that only the interest portion will be subject to tax while the principal por-tion will be tax free.
Sources say the finance ministry is rethinking and may eventually decide not to tax the principal portion of the EPF corpus. “Amidst all this confusion, the sil-ver lining is that the finance minister is willing to consider various suggestions on this matter and will take a view in due course,“ says Sonu Iyer, tax partner, EY.
The government has also clarified that the 60% taxable portion of the EPF cor-pus can escape tax if that sum is put into an annuity to earn a monthly pension. “The purpose of this change in tax regime is to encourage more private sector employees to go for pension security after retirement instead of withdrawing the entire money from the provident fund,“ says a note issued by the finance ministry.
Meanwhile, the change in tax rules has made the National Pension System (NPS) more attractive than pension plans from insur ance companies both in terms of flexibility and taxability. In the NPS, up to 60% of the corpus can be withdrawn on maturity and only 40% has to be annuitised. Also, 40% of the withdrawn amount is tax free. In case of pension plans, the investor can with-draw only up to 33% of the corpus while the rest is compulsorily invested in an annuity. “This disparity needs to be removed. All pension products should be taxed uniformly,“ says Arijit Basu, managing director, SBI Life Insurance.
Financial planners recommend NPS over pension plans from insurers because it is more flexible. In a pension plan, the premium remains fixed during the term of the plan.But NPS investors have to put a minimum `6,000 a year with no upper limit. “You can choose how much you want to contribute depending on your cash flows,“ says financial planner Pankaj Mathpal.Besides, you can switch your pension fund manager if you are not happy with the per-formance.