Government approves 8.7% EPF for 2015-16

Employee Provident Fund (EPF) is a retirement benefit applicable only to salaried employees.

It is a fund to which both the employee and employer contribute 12% of the former's basic salary amount each month, a percentage that is pre-set by the government.

Until now, there was no tax on investment, on interest accrued and on withdrawal of EPF.

Finance Minister Arun Jaitley proposed to impose a tax on 60 percent of Employee Provident Fund (EPF) corpus as part of the Budget 2016.

National Pension Scheme (NPS) withdrawals on retirement were proposed to be made partially taxable as well.

The basis of the government's decision was to bring all retirement schemes at par with each other.

A huge outcry broke over whether the entire 60% of the EPF corpus was going to be taxed or only the interest component.

Previously, the National Pension Scheme (NPS) had been taxable upon withdrawal and the new tax rule has been introduced to make the NPS more attractive.

However, the tax rules for NPS were also not clear under the new guidelines.

The government announced that the Public Provident Fund (PPF) scheme would remain exempted from taxes, clarifying doubts over vague references made in the Budget to introduce taxes for Provident Funds.

Further, 60 percent of contribution made to Employee Provident fund after April 1, 2016 would be taxed.

Small salaried employees with up to Rs.15,000/month income would be exempted from the proposed taxation.

While EPF contributions had been exempt from all taxes, withdrawals under the National Pension Scheme (NPS) had always been taxable.

Experts believe that the differential tax structure has impaired the growth potential of the NPS scheme.

The move to make all EPF schemes taxable was aimed at bringing the NPS and the EPF schemes at par with each other.

To shield his government from criticism, Prime Minister Narendra Modi suggested that Finance Minister Arun Jaitley defer the proposed tax on Employees' Provident Fund (EPF).

The PMO asked the Finance Ministry to undertake a detailed examination of the proposed tax.

The Prime Minister's intervention will bring relief to nearly 60 lakh EPF subscribers who earn more than Rs.15,000 per month.

Finance Minister Arun Jaitley withdrew his Budget proposal to tax employees' provident fund (EPF) at withdrawal.

"In view of representations received, the government would like to do a comprehensive review of this proposal and therefore I withdraw the proposal," Jaitley said in Lok Sabha.

However, he stated that the 40% exemption given to National Pension Scheme subscribers at the time of withdrawal will remain.

The Finance Ministry has ratified 8.7 per cent interest on PF deposits for almost 5 crore subscribers of the Employees Provident Fund organisation (EPFO).

This rate is however, lower than the 8.8 per cent decided by EPFO'S apex body-the Central Board of Trustees (CBT).

The interest rate was also reduced for Kisan Vikas Patra (KVP), Five-Year National Savings Certificates and Samridhi Yojana.