Budget 2016: EPF Contributions from April 2016 taxable!

The finance minister today announced that EPF contributions made after April 2016 will be partly taxable. That is, only 40% of the sum from such contributions will be tax-free. The rest is presumably taxable as per slab! This is terrible news for EPF subscriber!

Update: This is the official clarification:

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

See detailed tax illustration here: Budget 2016: EPF Taxation illustration

Here is what the finance minister said:

Measures for providing a pensioned society:

Pension Schemes offer financial security to senior citizens. I believe that the tax treatment should be the same for defined benefit and defined contribution pension plans. I propose to make withdrawal up to 40% of the corpus at the time of retirement tax exempt in the case of the National Pension Scheme.

In case of superannuation funds and recognised provident fund schemes  including EPF, the same norm of 40% of the corpus to be tax-free will apply in respect of corpus created out of contributions made after 1st April 2016.

Further, the annuity fund which goes to legal heir after the death of the pensioner will not be taxable in all three cases.

Also we are proposing a monetary limit for contributions made by employer in recognised provident funds and superannuation funds at 1.5 Lakhs per annum for taking the tax benefit.

Here is the  budget speech

Watch from 1: 30: 56 

What now?

This is certainly pretty bad news. If you are investing as per an asset allocation, then do not increase equity allocation because of this. Stick to it.

If you are a fixed income fan and were investing via VPF in addition to EPF or investing via NPS, go easy on those and have adequate equity exposure for long-term goals.

To summarise

Budget 2016 EPF rules

All Contributions made before 1st April 2016 + interest --> EEE

All Contributions made after 1st April 2016 + interest --> 40% EEE + 60% EET

Read more: Budget 2016: What should we do now?

Download EPF Calculator with Budget 2016 Taxation Rules



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29 thoughts on “Budget 2016: EPF Contributions from April 2016 taxable!

  1. Renga

    What about PPF? Are there no changes on the max amount one can deposit? Any changes interms of Taxation and interest rate on PPF?

    1. freefincal

      As clarified at AIFW, PPF is not included in this. Only those with employer contributions are part of this rule. PPF is a small savings scheme.

    1. freefincal

      That link does not say PPF. As per the budget this applies only to pension plans where there is a employer contribution involved. PPF is not such a instrument.

  2. Puneet

    I'm still a little unclear on this.

    I currently work at a private company where we've PF contribution done by both employee and employer.

    Suppose currently the amount accumulated in the account is X+Y, where X is employee's contribution and Y is employer's contribution.

    If, I stop working at the age of 45, how much will be amount I'll be allowed to withdraw ?

    Also, what is EEE and EET ?

    1. freefincal

      EEE --> both contributions and interest income will be tax free at all stages.
      EET --> contributions are exmpt from tax (80c), but final corpus (contributions+interest) is taxable as per slab.
      Please refer to new EPF 2016 withdrawal rules

      1. Kapil Tiwari

        Pattu, upto 31/3/2015, contribution plus interest income is EEE. What about interest on interest that one will get, after 1/4/2016, for contribution made before 31/3/2015?
        Furthermore, how will the Govt. demarcate and compartmentalise the EEE corpus and the EET corpus? Thanks.

  3. Indra

    What the HELL!!
    It just ruined the glamour of EPF!
    I have a handsome contribution mandatory in EPF due to being a PSU employee, and as per calculation my EPF maturity at the end of my service would have been around 4 Crore (approx). My current EPF contribution is 11000/ month (Total). As per new TAX rule 60% of the maturity amount will be taxable, i.e. 2.4 Cr will be liable to TAX. Being in 30% bracket I have to pay 30% of 2.4 Cr = Rs. 72 Lakh. OMG!! What this Govt is doing!

    1. freefincal

      Contributions made before 1st April 2016 are tax free. The 40% tax free applies to only contributions made on or after 1st April 2016

      1. Govind

        Further clarification from revenue secretary Hasmukh Adhia after budget clarified - there would be no tax on remaining 60% if its invested through annuity (pension products) to earn regular income

        Few things
        1. Looks like Some corporate's played their dirty trick here - to see/include their pension products (kitty 60% of ones corpus amount)

        2. Annuity returns are below par around 6.5% (current approx rate). Hence one need to stick to this low return for rest of his /her life, his/nominee with remaining 60% corpus amount)....in case if one wants to avoid tax while withdrawing remaining 60%

  4. Pradeep

    What a mess! Can they think trough, what about interest received from next year? How are they going to calculate! So disapointed. Also thier is no choice as epf is a must. This amounts to forced oppurtunity deprivation for the salaried. Lots of pvt employees are let go in early 50's they are not allowed to withdraw thier full amount and again they cannot earn interest after 3 years. Salaried class has been .... Yikes!!!

    1. MG


      What if i retire at 60 years but only withdraw from epf when i am 61 yrs and at 0% tax slab, does this mean at 61 yrs all epf will be tax free?

  5. Prasanna Rao

    Oh my God....this is truly shocking. Most frustrating budget seen ever. EPF is the backbone of retirement fund and Govt wants that money as well. Hope unions will make enough noise on this, we all should think about how we can make this a stronger cry..

  6. Mani

    Clause 112 of the Bill seeks to amend Part A of Fourth Schedule
    to the Income-tax Act relating to recognised provident fund.
    Rule 6 of the aforesaid Schedule, inter alia, provides that
    contributions made by employer to the credit of an employee
    participating in a recognised provident fund, which are in excess
    of twelve per cent. of the salary of the employee, are liable to tax
    in the hands of the employee.
    It is proposed to amend the said rule so as to provide an upper
    ceiling of one lakh and fifty thousand rupees to such contribution
    by the employer.
    This amendment will take effect from 1st April, 2017 and will,
    accordingly, apply in relation to assessment year 2017-2018 and
    subsequent years.

    Got the following extract from the bill.pdf from the http://indiabudget.nic.in/. Can you please clarify if the employer contribution of Superannuation will be affected by this clause? Say for example, if the employer contribution(12% of basic) towards EPF is 100000 and SA is 60000 then one's total eligibility is only Rs. 150000 and Rs 10000 will be taxed in the hands of the employee?

    1. freefincal

      Before this budget, if the employer contribution as was above 12% of basic then it was taxable. Now if that 12% reaches 1.5L, then any amt above 1.5Lis taxable. So basically your employer contribution will be capped at 1.5L by this ruling.

    1. Kapil Tiwari

      For the EET portion, employee's contribution plus interest (full corpus) will be taxed on withdrawal.

  7. Arjun

    if contributing to VPF (Apr 2016-Mar 2017) 1 lakh per year. Will withdrawal amount of 60% (60,000) be taxed again?How will VPF be impacted?

  8. Srinivas

    Does employee get option now to limit the PF contribution to 1,50,000 to avoid double taxation at the time of withdrawal ? Right now it is mandatory that employee contributes 12% of basic to PF. One has to pay tax on the amount exceeding 1.5lakhs.
    Also looks like in this budget tax exemption is given to employer only on contribution upto 1.5lakhs. Does it increase employers tax liability on the amount beyond this.

  9. Pushkar

    Hello Pattu,
    Can you please provide any more details on question asked by Mr. Kapil Tiwari ?

    ""Pattu, upto 31/3/2015, contribution plus interest income is EEE. What about interest on interest that one will get, after 1/4/2016, for contribution made before 31/3/2015?
    Furthermore, how will the Govt. demarcate and compartmentalise the EEE corpus and the EET corpus? Thanks.""

    Thanks in advance.

  10. Kamal Garg

    Not contribution but the accumulation and withdrawal.
    Nonsense and horrendous budget proposal.
    Complete squeeze of middle class salaried people.

  11. Kamal Garg

    To my knowledge, contribution to a recognized superannuation fund is covered under separate section and a separate 15% contribution by employer is tax exempted expenses in the hands of the employer.
    And therefore, 12% contribution towards PF (whether capped at 1.5 lakhs or not - or whichever is higher) and a separate 15% contribution towards SA fund is tax exempted expenses in the hands of the employer.


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