Budget 2016: Government clarifies on taxation of provident fund contribution, withdrawal

A day after the Union Budget 2016-2017 created disappointment among the salaried class and evoked sharp criticism from the opposition for the reported tax treatment of contributions to the provident fund (EPF and PPF), the Central government on Tuesday clarified that contributions won't be taxed at the time of withdrawal and that only the interest component will be subject to tax.

"The principal amount will not be taxed and will continue to remain tax exempt on withdrawal. What we have said is 40 percent of the interest accrued on contributions made after April 1 will be tax exempt and its remaining 60 percent will be taxed," revenue secretary Hasmukh Adhia told PTI.

The 60 percent will also be tax exempt if invested in a pension annuity schemes, he said. "This is not a revenue mobilisation exercise," he added.

He said the budget proposal to tax 60 percent of EPF withdrawal will affect less than one-fifth of employees with high salaries.

There are about 60 million salaried individuals who contribute to the retirement fund, the Employees Provident Fund Organisation (EPFO), which manages a corpus of about Rs 6.5 lakh crore, the PTI report added.

On Monday, Minister of State for Finance Jayant Sinha had tweeted that the government will come out with a clarification on the confusion soon.

1/ We have noted concerns about changes in tax treatment for EPF/PPF/NPS. Full clarification with FAQs will be issued shortly. @adhia03

— Jayant Sinha (@jayantsinha) February 29, 2016

He then tweeted the clarification on Tuesday.

As promised, releasing a press note clarifying the tax treatment for provident funds and NPS. pic.twitter.com/nwcxdBa7Ck

— Jayant Sinha (@jayantsinha) March 1, 2016