In a surprising move, Finance Minister Arun Jaitley has thrown a curveball that could potentially stump the salaried class, who have parked their retirement savings in the Employees’ Provident Fund (EPF). While there is an increase in the tax surcharge for the super rich, the salaried class is left grappling with a significant change.
The Finance Minister, in his budget proposal, has suggested that only 40 per cent of the withdrawal amount at the time of retirement would be tax exempt. This applies to National Pension Scheme, superannuation funds, recognized provident funds, including EPF for the contributions made post April 1, 2016.
In the past, the full accumulated savings under the National Pension Scheme (NPS) were taxable at the time of retirement. But now, only 60 per cent of the retirement corpus will be taxable. This change applies to EPF as well, making 60 per cent of the savings taxable at the time of withdrawal, a stark contrast to it being tax-free until now.
According to the Finance Minister, this move is aimed at bringing uniformity in the tax treatment of EPF, NPS, and superannuation pension funds.
- The EPFO currently manages around Rs.10 lakh crore of retirement savings from 8.5 crore members.
- The NPS has 1.15 crore members with savings amounting to Rs. 11 lakh crore.
Additionally, the Finance Minister has proposed a one-time exemption from any tax liability for those who wish to transfer their retirement savings from a recognized provident fund or superannuation fund to the National Pension System.
Tax incentives are also proposed for the Sovereign Gold Bond Scheme and the Gold Monetisation Scheme.
Level Playing Field
There will be no tax arbitrage in the pension products (NPS, EPF, superannuation fund).
With the schemes now on an equal footing, employees will make their choice based on efficiency and returns.
This change will impact higher income groups whose contribution exceeds Rs. 1.5 lakh to PF and/or superannuation will be taxed during the time they make and when they withdraw.
The proposed one-time portability exemption from a recognized provident fund or superannuation fund to the National Pension System will greatly benefit employees. This move could potentially increase the rate of return on a much larger amount of funds.
Gold Bonds
It has been proposed that the redemption of Sovereign Gold Bond issued by RBI under Sovereign Gold Bond Scheme, 2015 will not be subject to capital gains tax.
It is also proposed to provide that long term capital gains arising to any person on transfer of Sovereign Gold Bond shall be eligible for indexation benefits.
Additionally, it is proposed that the interest and capital gains earned on the deposits under the Gold Monetisation Scheme should be tax exempt.
It has also been proposed to increase the surcharge levied on individuals earning above Rs. 1 crore a year from 12 per cent to 15 per cent. A 10 per cent tax to be levied on individuals or companies earning dividends more than Rs. 10 lakh.
Those who earn less than 5 lakh a year will now receive a tax rebate of Rs. 5,000 under section 87A, up from a rebate of Rs. 2,000 earlier. This will provide a relief of Rs. 3,000 in their tax liability to the two crore tax payers in this category.
Currently, individuals who do not receive house rent allowance or do not own a house receive a tax deduction of Rs. 24,000 per year from their income. This has been increased to Rs. 60,000 per year, providing relief to those living in rented accommodations, according to the Finance Minister.
