60% of EPF withdrawals to be taxed after April 1

Touting as a measure to encourage investors to stay in pension schemes for a long time, the Budget for 2016-17 proposed to tax 60 per cent of withdrawals from Employees Provident Fund (EPF) and other superannuation funds of the same nature if the same is not invested in annuity.

The proposal brings all pension funds including NPS and other superannuation funds at par.

“If a person withdraws 40 % from any pension plan, he will not have to pay any tax. However, if he withdraws 60 per cent from the pension funds and plans to consume it in that year, he will have to pay tax,” Minister of State for Finance Jayant Sinha clarified post-Budget 2016-17.

However, the rule will apply only to those funds which are created out of contributions made by employees from April 1, 2016. At present, the EPF is taxed only in case of an employee leaving his job before completion of five years. EPFO has nearly six crore subscribers.

“In case of superannuation funds and recognised 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,” Finance Minister Jaitley said in his Budget speech.

"Pension schemes offer financial protection to senior citizens. I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans," Jaitley said.

The Budget proposed that annuity fund which goes to the legal heir after the death of a pensioner will not be taxable in all three cases. It also proposed to enhance monetary limit for contribution of employer in recognised Provident and Superannuation Fund to Rs 1.5 lakh per annum for availing tax benefit.