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EPF Calculator: Impact of Budget Announcement

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The Finance Minister dropped a bomb on many in the salaried class by announcing tax on withdrawal of EPF (Employee Provident Fund) corpus at the time of retirement.

There has been a lot of protest against this move by the Government.  The Finance Ministry had to issue a clarification to assuage concerns of many investors. The Finance Minister has confirmed that the proposal of EPF taxation would be reviewed. Given the outcry, I wouldn’t be surprised if the entire proposal will be rolled back. There is some disconnect between finance bill, clarification issued and what the Revenue Secretary spoke a few days back.

Better clarity will emerge after the discussion in Parliament on Budget speech and passage of Finance Act.

Till such time, let’s try to assess the impact of such announcements on your EPF corpus at the time of your retirement.

In this post, I will list down the proposed rules (in fact, there is confusion about the proposal too). I have prepared an Excel based EPF calculator to assess the tax cost of budget announcements.

EPF Tax Changes (Budget Announcements)

Old Rule 1: Contribution from employer to you EPF account is not taxed.

New Rule 1: Contribution from employer to your EPF account in excess of Rs 1.5 lacs per financial year will be taxed in your hands. Hence, if your employer contribution to your EPF account is Rs 1.8 lacs per year, the excess Rs 30,000 per annum will be added to your income and taxed accordingly.

Old Rule 2: Own contribution, employer contribution and the interest earned on EPF balance is exempt from tax at the time of retirement.  (Not talking about premature withdrawals)

New Rule 2: Contributions till March 31, 2016 and interest thereon continue to get the same tax treatment. For contributions made on or after April 1, 2016, interest earned on such amount shall be taxed. The entire interest earned won’t be taxed. 40% of such interest earnings shall be exempt from income tax.  Contribution (self or employer) will not be taxed in any manner.

So, as it stands, 60% of the interest earned on the contributions made on or after April 1, 2016 shall be liable to income tax.  Even for this 60%, you can avoid income tax if you purchase annuity for 60% of the EPF corpus.

However, annuity market is underdeveloped in India and the annuity rates are quite low. You may be better off paying tax on the corpus rather than purchasing annuity just to avoid income tax.

The new rules (rule no. 2) do not apply to those whose salary is Rs 15,000 per month or less.

(Even from the clarification issued by the Ministry of Finance, it appears that the 60% of the entire corpus will be taxed).

EPF Corpus Calculator (Post Union Budget announcements)

Since I am not yet clear what shape EPF taxation will take by the end of the month, I developed a Basic

EPF Corpus Calculator gives your EPS corpus at the time of retirement under the following three scenarios.

Scenario 1: Only interest on contributions on or after April 1, 2016 will be taxed

Scenario 2: Both contribution and interest or after April 1, 2016 will be taxed

Scenario 3:  Entire EPF corpus is taxable

I don’t know which one will be applicable by the time Finance Act is passed

Inputs to the EPF Calculator

  1. Current Age
  2. Retirement Age
  3. Current Monthly Basic Salary
  4. Expected increase in monthly salary per annum
  5. Current EPF Balance (at the end of FY2016)
  6. EPF interest rate

It goes without saying the output can vary significantly based on the value of these inputs. The difference can be really significant.

Assumptions in the EPF Calculator

  1. The rate of interest on EPF has been taken as constant during the entire term. You can change the interest rate but the same rate will apply for all the years.
  2. Contribution to EPS has been considered at minimum of Rs 1,250 or 8.33% of basic salary per month. Hence, employer contribution to EPF has gone down by that amount.
  3. You will withdraw EPF balance at the time of retirement only, which is between 58 and 60.
  4. Premature exits have not been considered.
  5. I have considered the proposal that EPF corpus won’t be taxed if the basis salary is Rs 15,000 or less. I don’t which basic salary they are referring to i.e. starting, ending or per contribution. Therefore, I have ignored the information in this analysis.

There may be many more implicit assumptions which are missing from the list.

Illustration

EPF Calculator Budget Illustration 1

EPF Calculator Budget Illustration 2 EPF tax calculator

You can try out the impact by feeding the numbers applicable to you. You can see the impact can be substantial in case contributions are also taxed.  In case of interest only, the impact is very low.

You can download the EPF calculator here. I have not done much of sanity testing with the calculator. Do let me know about any errors in the calculator by leaving your inputs in the comments section.

Please note these are mere budget proposals. These rules will come into force post the passage of the Finance Act. It is quite possible that the Finance Minister may withdraw the entire proposal.

11 thoughts on “EPF Calculator: Impact of Budget Announcement”

  1. Thanks Deepak for the valuable info. What wld be the tax implications if a pportion of EPF is withdrawn before retirement – let’s say for child’s education or marriage

    1. Deepesh Raghaw

      You are welcome, Bobby.
      I am not very clear. Logical extension would be apply this to premature withdrawals too. Otherwise, people will try to take out bulk through premature withdrawals.
      Let’s wait for the final rules. I wouldn’t be surprised if the entire proposal is rolled back.

  2. I have a query regarding EPF:

    I used to work in a private company upto 28/12/2015. From 29/12/15 I joined Govt job and currently I am covered under NPS.

    I want to know whether I can Convert my EPF account in GPF so that i can contribute Voluntarily in Newly converted GPF. If it can be done, what are the rules governing this and where to start. My EPF was maintained by my company trust.

    1. Deepesh Raghaw

      Since you are already investing in NPS, I doubt you will have access to GPF. Moreover, I am not sure if you can voluntarily contribute to GPF without support from employer. However, I am not an expert on these operational matters.
      You can check on other online resources.

  3. Hi,

    I think this post is old and may not be relevant now. Govt has rolled back the taxation of EPF and VPF. Earlier 60% was to be taxed but now its 100% tax free. They now continue to be under EEE. (unless you withdraw before 5 yrs). I got this info from my employer, Can you please confirm.

    Thanks

  4. Hi Deepesh
    1. I have worked in Employer1 for 5 year ( July 2010 to July 2015) . Under PF Office
    2. Then I worked Employer2 for 1.5 Year ( July 2015 to Nov 2016) . PF- Trust
    3. Then Working in Employer3 from Nov2017. PF-Trust
    4. Now I am planning to work abroad from October 2017.
    5. My Employer1 and Emplyer2 PF account are mapped with common UAN number. But Employer3 account number is linked with different UAN number  . Now I have two UAN number
    6. Also I have transferred the Employer1 PF balance ( only) to Employer2 . However Pension part is still with PF office.

    Now please Suggest me the best possible option for me
    1. Withdraw all PF/pension balance from all three employer
    2. Keep as it is .
    3. Transfer old PF and pension part to latest Employer3 and hold the amount
    I have no idea if the questions are stupid . Please help me . Thanks in Advance

    Regards
    Tanusree

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