The finance minister today announced in the Lok Sabha that paragraphs 138 and 139 in his budget speech will be withdrawn.
Paragraph 138 (withdrawn) "In case of superannuation funds and recognized provident funds, including EPF, the same norm of 40% of corpus to be tax free will apply in respect of corpus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".
EPF continues to be tax-free upon withdrawal. Employer contribution which exceed 12% of basic is fully taxable as per current rules. There is no limit to the employer contribution but it cannot exceed 12% of basic.
There was never any limit on employee contributions. VPF subscribers can breathe a sigh of relief for now!! There are no double taxation problems.
What does 40% of the corpus at the time of retirement mean?
40% of total corpus or 40% of total withdrawable corpus? That is, is the minimum 40% annuity still in force? We need a clarification from PFRDA in this respect.
Also the government is still resolved to make the tax treatment of the NPS similar to that of EPF. It cannot financially afford to make NPS EEE like EPF. Therefore sooner or later, EPF will be taxed.
140 "I propose to exempt from service tax the Annuity services provided by the National Pension System (NPS) and Services provided by EPFO to employees".
What a week it has been! I wish the government had handled this better.
Extract from his speech today:
Watch from 2:45 min for the rollback.
"The main argument is that the employee should have choice of desire where to invest. Theoretically, such freedom is desirable but it is important for the government to achieve policy objectives by the instrumentality of taxation. "In the present reform, the policy objective is not to get more revenue but to encourage the people to join the pension scheme. There are various suggestions received, which can also achieve the same policy objective of encouraging people to join the pension scheme,"
The government likes choice theoretically! Its main objective is to make the NPS more popular. When I say 'its' I am not referring to the current government. This push towards NPS is dependent on economics and not politics.
- The revised EPF withdrawal rules stay. While this is not ideal, it not a terrible deal for those who want to withdraw early.
- Stay away from NPS as of now. Do Not Invest Rs. 50,000 in NPS For Saving Tax! Especially because of the lack of clarity as mentioned above.
- By the way Do not buy Sovereign gold bonds! 🙂
- Stick to your asset allocation. Never change it because of tax rules. We invest to beat inflation. Not taxes.