# Budget 2016: Don’t worry -Tax on EPF is quite small!

There has been a huge outcry over the proposed tax on the EPF in budget 2016. The contradictions between TV interviews and actual documents compounded the problem. Yesterday I had presented an EPF tax illustrationHere are some more.

If the budget proposals are not 'rolled back', do not worry. The tax outgo on EPF even for new accounts is quite small. Do not make the mistake of buying an annuity just to save to tax!

I am preparing a EPF taxation calculator. A few results are posted here.

We shall calculate up to age 58. Withdrawals rules are not yet clear. So for this discussion we will assume EPF (both contributions) are locked until age 58.

Employer contributions have a ceiling of Rs. 1.5 Lakh a year.

We will assume tax rules are subject to 60% of the the corpus (contributions+interest) arising from subscriptions after 1st April 2016.

The balance  as on Mar 31st 2016 and its future interest are tax-free.

What is the maximum tax that one has to pay on EPF? Let us find out.

## Fresh EPF Accounts

Only new subscribers who join on or after 1st April 2016 will have to pay the maximum amount of tax.

Example:

Starting Basic: Rs. 1,00,000

New EPF Acct started on 1st April 2016.

Age 24.

If the Tax slab is 0% (that is tax free)

This person will have to pay nothing as tax and the IRR (internal rate of return) = 8.8% (EPF rate assumed).

Tax Slab 10%

Effective Tax rate (ETR): 6.2% (that is 6.2% of total corpus will be lost to tax)

IRR: 8.49%

Tax Slab: 20% --> ETR: 12.4% --> IRR: 8.15%

Tax Slab: 30% --> ETR: 18.5% --> IRR: 7.79%

This is the maximum tax outgo for new accounts.  For old accounts, the tax outgo will depend on age and current balance.

## 5 year old EPF account

* Age of account assumes person started working at age 24. This is not an input in the calculator

Current Age: 29

Current Basic: Rs. 1,00,000

Current Balance: Rs. 5,00,000

Tax Slab: 10% --> ETR: 5.5%   --> IRR: 8.49%

Tax Slab: 20% --> ETR: 11.0% --> IRR: 8.15%

Tax Slab: 30% --> ETR: 16.5% --> IRR: 7.79%

## 10 year old EPF account

* Age of account assumes person started working at age 24. This is not an input in the calculator

Current Age: 34

Current Basic: Rs. 1,00,000

Current Balance: Rs. 10,00,000

Tax Slab: 10% --> ETR: 4.9%  --> IRR: 8.48%

Tax Slab: 20% --> ETR: 9.8% --> IRR: 8.13%

Tax Slab: 30% --> ETR: 14.7% --> IRR: 7.77%

## 15 year old EPF account

* Age of account assumes person started working at age 24. This is not an input in the calculator

Current Age: 39

Current Basic: Rs. 1,00,000

Current Balance: Rs. 15,00,000

Tax Slab: 10% --> ETR: 4.3% --> IRR: 8.46%

Tax Slab: 20% --> ETR: 8.5% --> IRR: 8.10%

Tax Slab: 30% --> ETR: 12.8% --> IRR: 7.72%

## 20 year old EPF account

* Age of account assumes person started working at age 24. This is not an input in the calculator

Current Age: 44

Current Basic: Rs. 1,00,000

Current Balance: Rs. 20,00,000

Tax Slab: 10% -->3.6% ETR:  --> IRR: 8.43%

Tax Slab: 20% --> 7.2% ETR: % --> IRR: 8.04%

Tax Slab: 30% --> 10.4% ETR: % --> IRR: 7.64%

The maximum tax outgo is ~ 18.5% for a new account at 30% slab and is much lower for older accounts.

This is a small amount, essenially amounting to only a small drop in EFP rates.

Do not buy an annuity just to save taxes! Buy an annuity to the extent that you need it. Remember that locking away money in an anuity is permaent and if there is an emergency you will be in trouble.

The annuity rate is quite low at age 58 and the pension is fully taxable as per slab. So it will never beat inflation and can threaten financial independence in retirement. Pay the tax and invest the EPF corpus to generate an inflation protected income

References

Clarification about Changes made in the Tax Treatment for Recognised Provident Fund & National Pension System (NPS)

budget speech

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## 11 thoughts on “Budget 2016: Don’t worry -Tax on EPF is quite small!”

1. There are many employees who subscribe to Voluntary Provident Fund i.e contribute more than the usual 12% because they trust their organisation and accumulate a larger corpus without any effort from their side. This tax kills VPF even if it may not be the best investment.
What would be the effective tax rate for a person in 30% tax bracket making a 10% extra VPF when s/he retires?

2. Hi,

Is the calculation based on tax on completely final corpus amount which includes both contribution and interest or just interest.
18.5% is

Tax Slab: 30% --> ETR: 18.5% --> IRR: 7.79%

Is this 7.79% calculated assuming tax deduction on both contribution and interest?

Can you share the excel calculator that you used to come up with this number?

Thanks
praveen

1. Both contributions and interest are assumed to be taxed here. Option is available in calculator. Will post it in a little while.

3. I just moved to US, i have the PF account (5 years Old), can i withdraw within 2 months and what is the tax implications for now and after 1st April 16 ?

4. Pattu,
Question is not of big or small. Question is WHY the tax? EPF was supposed to be a forced way of accumulating for retirement age. You expect old people with multiple ailments to sit and calculate how much before 1/4/2016 what interest was earned on that then 40% is tax free incl. interest and then rest 60% incl. interest will be taxed as per slab. Considering various lockings(cannot withdraw before 58 yrs of age even if ur family is on roads), tax the final sum can surely not beat inflation. Is this what the govt. wants? The question was never about small outgo, the question if WHY and who is govt to plan how my retirement should be. If you are truly pro-people, make EPF optional and then see the effect. Sorry for the rant but had to say what I said.

1. I understand your rant, but I am not interested in WHY. Does not help take decisions in anyway.

5. Hi i want to know if i am laid off(very highly possible) will i be able to withdraw from epf?

1. As of now the rules are, you can withdraw within 3Y. But we need more clarity on the tax part.

1. Earlier you can withdraw the entire corpus (without any tax) if you are out of job for 2 months.
But with new rule, you can withdraw only the employer portion of EPF if you out of job for 2 months and employee contribution will be provided only at the age of 58 years (you can apply for it at 57 years).

-Praveen