Balwant Jain
There is huge confusion about taxation of the retirement corpus accumulated through various schemes such as employee provident fund (EPF) or National Pension scheme (NPS) or even Public Provident Fund (PPF). Let us understand the tax benefits and withdrawal options under three of these retirement products –EPF, PPF and NPS.
Why push for NPS when we already have EPF
There is a push for NPS which is evident from various factors like, making 40% of the balance in NPS account at retirement. There seems to be reasons behind this move. The government wants to move away from defined benefits schemes of pensions to defined contribution plans. Under the former system, the contributor is assured a minimum amount of pension irrespective of his contribution however under the defined contribution system the employee is entitled to benefits based on the corpus created out of contributions made by him. The system of defined benefits puts additional burden on the employers. The defined contribution system stops the cross subsidisation prevalent under the defined benefit scheme.
Tax treatment
Presently, the tax treatment of employers’ contribution to NPS as well as EPF and PPF are different. The employers’ contribution to EPF is fully exempt upto 12% of the salary without there being any absolute monetary limits. As against this presently there is no upper monetary limit under NPS for employer’s contribution, within 10% of the salary of the employee.
Moreover, under the EPF scheme the employer cannot contribute more than the employee in EPF whereas there are not such restrictions under NPS. Even it is not necessary under the NPS schemes for employee and employer both to contribute. So, the NPS route can be used for excellent tax planning by employer for their employees in highest tax slab, say for a person with salary of Rs. 1 Crore, the employer can contribute 10% i.e. 10 lakh which employee can claim tax exempt the same benefit is not available in case of EPF.
Employee’s contribution to EPF is eligible for deduction upto Rs. 1.50 lakh under Section 80 C. Likewise, employee’s contribution to NPS also qualifies for deduction upto Rs. 1.50 lakh under Section 80 CCD(1). Both these deduction are subject to the restriction of Rs. 1.50 lakh under Section 80CCE. However Section 80 CCD(1B) provides for an additional deduction if the employee contributes Rs. 50,000 to NPS over and above the basic limit of Rs. 1.50 lakh. This extra deduction is not available for EPF contribution.
Under PPF system the contribution is eligible for deduction under Section 80 C upto Rs. 1.50 lakh for contribution made towards the PPF account of self, spouse and children. The interest accruing on it is fully exempt and there is at present no to tax on the corpus accumulated at the time of maturity.
Under the NPS, 40% of the corpus is fully exempt and the account holder has to compulsorily purchase an annuity from an insurance company for minimum of 40% of corpus at the time of retirement or at the end of the extended period. The balance 20% is fully taxable which the employee can postpone by using the same for purchase of annuity for 60% of the corpus instead of mandatory 40%.
For EPF the budget of 2016 had proposed to make 60% of the corpus as taxable, which was later on withdrawn but there is a fair chance of the same being reintroduced in any other form later on. At present the accumulated balance in EPF is fully exempt including interest accrued till maturity.
Withdrawal rules
PPF account comes with an initial tenure of 15 years. It can further be extended by a block period of five years at a time. You can do such extensions as many times. The amount on maturity is fully available to the account holder without there being any need to buy any annuity or pay tax. The amount available in PPF account can be withdrawn beginning from seventh year without there being any restrictions as to the end use of the money withdrawn.
As far as withdrawal from EPF is concerned, the government tried to play with this also and issued an order in February 2016 providing that the employee cannot withdraw the employer’s contribution before retirement. This order has ultimately been withdrawn for good. As per the present situation, the balance in EPF account can be withdrawn if you do not transfer the balance from one employer to another.
However, in case such withdrawal has been made before completion of five years of contributions either under the same employer or under different employers, the entire amount so withdrawn becomes taxable and tax is deducted at source @ 10 percent in case amount of such withdrawal exceeds Rs. 50,000.
The amount to the credit of EPF during your employment can be withdrawn for certain limited purposes like for purchase of plot, house, construction of house of repayment of home loan within certain limits. Withdrawal are also possible for other purposes like marriage, education, illness etc within specified limits. The amount accumulated at retirement can be fully withdrawn without there being any tax or requirement to buy annuity.
As far NPS is concerned before the rules for withdrawals were amended in 2015, there were no provisions for mid way withdrawal from NPS account. However, the same have been modified to allow 25% of the balance to partially align them with provident fund scheme. However the eligibility to withdraw is restricted to the contribution and income accrued on employee’s contribution only.
Earlier, the employee was required to withdraw the money once she reached the age of 60 years, however under the revised rules the employee can postpone withdrawal for three years. He can also opt to contribute till 70 years of age and thus extend the period for accumulation of the corpus.
From the above discussion it becomes clear that though the PPF is better option from tax angle and is equally good option for non salaried employees, NPS still offer better scope for tax planning for higher salaried person. The answer to ultimate suitability will depend on individual’s situation.
Balwant Jain is a CA, CS and CFP. Presently working as Company Secretary of Bombay Oxygen Corporation Limited. Views are personal. He can be reached at jainbalwant@gmail.com
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