Budget 2016: Here's an explainer on EPF tax shocker

By Surya Bhatia The popular demand over the last many years to make National Pension Scheme (NPS) tax free in like other retrial benefits read EPF made everyone believe that this year NPS would get the same parity as others and will get a tax free status. And yes, FM did oblige by giving it parity but the googly was, he made EPF taxable partially and made NPS tax free partially thereby making them equals. [caption id=“attachment_2620080” align=“alignleft” width=“380”]  Thinkstock[/caption] Hence it is proposed to tax 60 per cent of the corpus of the provident fund at the time of withdrawal, on prospective basis i.e. from 1st April 16 onward. So the corpus as on 31st March 16 is exempt and any future contribution from April 1, 2016 gets taxable on a prospective basis. And in National Pension System (NPS), and other pension plans where the government has proposed to exempt 40 per cent of the corpus from tax at the time of withdrawal. And at maturity investor has an option to convert the balance 60% in an annuity plan which results in deferment of taxes and in some cases lowering of marginal rate of tax. EPF pre budget, enjoyed Exempt, Exempt, Exempt (EEE) status at the investment, earnings and withdrawal stages, & NPS was taxable at the time of withdrawal. Now with the proposed changes, EPF status changes to Taxable, exempt, Taxable (TET) status as it is proposed to tax the investment stage also i.e. contribution by the employer if it exceeds 1.50 lakh p.a. So can we see intent by the FM to have a shift from a fixed income to a mark to market income as NPS in the new avatar holds an edge over EPF? This is mainly due to the extra tax benefit under Section  80CCD OF Rs.50, 000 as well as the annuity plan it offers thereby deferring the taxes. And on top of it the equity exposure which can be taken via the NPS route which is capped at 50% of the investment. (The writer is a managing partner at Asset Managers)