Even as the Union Budget brought the rural sector to the forefront, some of the tax proposals announced by Finance Minister Arun Jaitley have hit the salaried class hard. One such proposal is that 60% of contributions made after April 1, 2016, to the Employee Provident Fund, Public Provident Fund and National Pension Scheme will be taxed on withdrawal.
But the proposal has led to a lot of resentment among those who use such schemes to invest for their life after retirement. Now, Minister of State for Finance Jayant Sinha has said a clarification will be issued soon.
"We have noted concerns about changes in tax treatment. Full clarification with FAQs will be issued shortly. Have proposed prospective changes in budget. Existing savings are not impacted in any way," Sinha said.
As per the Union Budget announced on Monday, the contributions made on or after April 1, 2016 by an employee participating in a recognised provident fund and superannuation fund, up to 40% of the accumulated balance attributable to such contributions on withdrawal shall be exempt from tax.
Any payment in commutation of an annuity purchased out of contributions made on or after April 1, 2016, which exceeds 40% of the annuity, shall be chargeable to tax.
At present, social security schemes run by retirement fund body EPFO are tax free 'Exempt-Exempt-Exempt (EEE)' scheme under which deposits, accrual of interest and withdrawals are tax free.
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, 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% 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% 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 NPS and services provided by EPFO to employees.
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 to Rs 50,000 from existing Rs 30,000
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