In order to bring parity in tax treatment of different types of pension plans, the Finance Bill, 2016 proposed to amend Section 10 to provide that 40% of total corpus withdrawn at the time of retirement under recognized provident funds and NPS would be exempt. However, there seems to be lack of understanding about such proposed changes. Thus, the Govt. has released following clarifications:
i) The purpose of this reform of making the change in tax regime is to encourage more number of private sector employees to go for pension security after retirement instead of withdrawing the entire money from the Provident Fund Account.
ii) It is expected that the employees of private companies will place the remaining 60% of the Corpus in Annuity, out of which they can get regular pension. When this 60% of the remaining Corpus is invested in Annuity no tax is chargeable. So the entire corpus will be tax free, if invested in annuity.
iii) The main category of people for whom EPF scheme was created are the members of EPFO who are within the statutory wage limit of Rs.15,000 per month. Out of around 3.7 crores contributing members of EPFO as on today, around 3 crore subscribers are in this category. For this category of people, there is not going to be any change in the new dispensation.
iv) There is no change in the existing tax treatment of Public Provident Fund (PPF).
v) We have received representations today from various sections suggesting that if the amount of 60% of corpus is not invested in the annuity products, the tax should be levied only on accumulated returns on the corpus and not on the contributed amount. Finance Minister would be considering all these suggestions and taking a view on it in due course.