To bring about parity in New Pension Scheme and other retirement schemes, the government proposed in Budget to impose tax at the time of withdrawal on 60 per cent of the contributions made after April 1, 2016, to EPF and other schemes

New Delhi: Revenue Secretary Hasmukh Adhia clarified today that "Only interest accrued on 60 per cent contribution to EPF after April 1, 2016 will be taxed; principal amount to remain tax exempt". Also " PPF contributions will continue to be tax exempt; no tax on withdrawal and small salaried employees with up to Rs 15,000/month income will be kept out of purview of proposed taxation of EPF" he said.

Yesterday while announcing the Budget, to bring about parity in New Pension Scheme and other retirement schemes, the government decided to impose tax at the time of withdrawal on 60 per cent of the contributions made after 1 April, 2016, to EPF and other schemes. The proposal has come as an unexpected shocker for the salaried class.

At present, social security schemes run by retirement fund body EPFO are tax free EEE scheme. That means deposits, accrual of interest and withdrawals are tax free under the scheme.

In order to bring greater parity in tax treatment of different types of pension plans, it is proposed that the contributions made on or after April 1, 2016 by an employee participating in a recognised provident fund and superannuation fund, up to 40 per cent of the accumulated balance attributable to such contributions on withdrawal shall be exempt from tax, said Budget Memorandum.

It is proposed to provide that any payment in commutation of an annuity purchased out of contributions made on or after April 1, 2016, which exceeds 40 per cent of the annuity, shall be chargeable to tax.

Under the existing provisions of section 80CCD, any payment from National Pension System Trust to an employee on account of closure or his opting out of the pension scheme is chargeable to tax.

Announcing measures for moving towards a pensioned society, Finance Minister Arun Jaitley said, "Pension schemes offer financial protection to senior citizens. I believe that the tax treatment should be uniform for defined benefit and defined contribution pension plans."

He said, "I propose to make withdrawal up to 40 per cent of the corpus at the time of retirement tax exempt in the case of National Pension Scheme. In case of superannuation funds and recognised provident funds, including EPF, the same norm of 40 per cent of corpus to be tax free will apply in respect of corpus created out of contributions made after April 1, 2016."

The minister also said that the annuity fund which goes to the legal heir after the death of pensioner will not be taxable in all three cases.

He proposed a monetary limit for contribution of employer in recognised Provident and Superannuation Fund of Rs 1.5 lakh per annum for taking tax benefit.

The minister also proposed to exempt from service tax the Annuity services provided by the National Pension System (NPS) and Services provided by EPFO to employees.

The government has also proposed that 14 per cent service tax on services provided by Employees’ Provident Fund Organisation (EPFO) to employees, being exempted, with effect April, 2016.

The budget has also proposed to increase the threshold for deducting tax deducted at source (TDS) on payment of accumulated balance due to an employee in EPF Rs 50,000 from existing Rs 30,000.

Last year budget had provided that the members of private provident fund trusts will not have to pay tax on pre-mature withdrawals provided the amount is either less than Rs 30,000 or their tax liability is nil even after including the withdrawn sum to their income.

Not surprisingly, the government's decision on EPF met with strong reactions on social media:

Why only tax the only social security, paying decent safe returns to fall back on for rainy day for working class? Take the whole away! #EPF — AnanD (@aThakkali) March 1, 2016

Trade unions have also reacted strongly yo the proposal.

G Sanjeeva Reddy, president, INTUC, also a member of the EPFO's Central Board of Trustees has been quoted as saying in a report in The Indian Express that the proposal will have to be rolled back. "If they don’t roll it back, we will hold a nationwide strike,” he has threatened.

Interestingly, the Bharatiya Mazdoor Sangh, a BJP arm is not favour too, the IE report said.

A report in The Times of India noted that it is the younger tax payers who will be more affected than those who have only a few years to retire.

With the concerns over EPF heightening, minister of state for finance Jayant Sinha was forced to tweet that the government will come out with an FAQ:

1/ We have noted concerns about changes in tax treatment for EPF/PPF/NPS. Full clarification with FAQs will be issued shortly. @adhia03 — Jayant Sinha (@jayantsinha) February 29, 2016

With inputs from PTI