Budget 2016: What should we do now?

As the day wore on yesterday, the serious tax implication of yesterday's budget became clear. As of now, I am pretty sure only about the information posted yesterday:

Budget 2016: EPF Contributions from April 2016 taxable!

Budget 2016: National Pension Scheme – 40% of withdrawal made tax free!

Jayant Sinha confused a lot of people with this interview!

Although there is no mention of it in the finance bill, he said PPF will also be taxed similar to EPF and NPS and that annuities will be tax-free.

He later tweeted

So let us wait for clarity on this.

My take: What should we do now?

Nothing except perhaps

  • petition the government for change!
  • Mentally prepare yourself for paying tax! The actual tax liability is not so much as the mental perception.
  • Think real hard before gravitating toward tax-free bonds.
  • Liquidity is king. I will happily pay tax as per slab for 60% of the corpus if there are more attractive options available for Generating an inflation-protected income with a lump sum
  • A small exposure to annuity is important but do not think of going overboard just becauce one does not have to pay tax on the amount use to purchase the annuity (or if the annuity is tax-free! - need confirmation for this)

Stick to your asset allocation and invest as usual as long as that asset allocation has a very good chance of beating inflation. If want to calculate this, try Ddeciding on asset allocation for a financial goal.

If you are retiring in the near future, then the tax liability is not so high anyway. So don't worry about it. If you are retiring decades away, there is a lot of budget between now and then so. So do nothing.

Courtesy: Bridge of Spies.
Courtesy: Bridge of Spies.

You can consider withdrawal strategies a few away from retirement depending on the tax rules at that time. 

Should I switch to NPS?

The government wants you to I guess. My take: switch only if there is no mandatory requirement to purchase an annuity ( current rule of min 40% of corpus may be removed)

If annuity purchase is mandatory then think twice before switching from EPF to NPS.

Lessons from Budget 2016

  • Tax laws change!
  • Operate as if all instruments will be taxed as per slab (investments+gains) upon withdrawal.
  • Never invest as per tax laws. Invest as per the requirements of the goal.

Download EPF Calculator with Budget 2016 Taxation Rules

Register for the Hyderabad DIY Investor Workshop Nov 27th 2016

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7 thoughts on “Budget 2016: What should we do now?

  1. Rajendra

    Paying Tax is not a worry. What worries us is Mis-management of Tax collection to fund likes of Vijay Mallya etc. EPS-95 which is management by GOI is in bad shape. We have contributed from 1995 to get pension and today their is uncertainty of getting pension thru this scheme. This is hurting us.

  2. Syamantak

    Add one another point:

    Time to change the description of the Android app "Freefincal Retirement Planner". EPF/PPF are no more tax free 🙁

    tax-free fixed income (PPF, EPF, etc.)

  3. Prof. D N Panigrahi

    Minister Jayant Sinha was not correct in saying that Periodical Annuity Income is tax free. Periodical Annuity Income will be added to the annuitant's taxable income. But amount of EPF/PPF/NPS corpus utilised to buy annuity will be tax free, ie, will Not be subjected to tax.

    1. Prof. D N Panigrahi

      Today Govt. has clarified, bowing to the popular outcry, that PPF on withdrawal will continue to remain tax exempt. And also only interest on 60% of EPF contributions made from April 01, 2016 will be taxed on withdrawal and principal contributions will be tax exempt on withdrawal.

    2. sudhir seetharam

      If annuity are taxed, there is no point to go in for annuity plan, First of all the annuity payments are less than the market payments from Bank.

      1. Prof. D N Panigrahi

        First we should understand the objective of buying annuity. Annuity for Life or life annuity insures against extra ordinary longevity risk. Longevity risk is the risk that one will live longer than expected. Extra ordinary longevity means the person, if he depends on self-managed investment plan, there are ample chances that he may outlive his savings. So annuity comes to the rescue and acts as a longevity insurance and the person (annuitant) gets the annuity as long as he lives. Here the longevity risk and the risk of outliving one's savings is transferred from the annuitant (annuity policyholder) to the life insurance company (the annuity service provider).


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