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:
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
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.
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?
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