Employee Provident Fund (EPF) is not Tax free Anymore, 60% of EPF Withdrawals will be Taxed as Income

One of the most important and controversial points of the recently concluded Indian budget 2016 is the taxation on Employee Provident Fund withdrawals. Earlier, similar to PPF, EPF was also completely tax-free, i.e., whatever amount you invest in EPF, up to 1.5 lakh under section 80C, was deducted from your taxable income. There was no tax on gains made by EPF, and the maturity amount was also exempted from tax, but not anymore.

As per the recent budget, only 40% of EPF withdrawals are tax-free, and you need to pay tax on the remaining 60%; this is huge because it can push even the low-income class to the highest tax bracket of 30% when they withdraw their EPF savings.   

This means you have to pay a huge lump sum tax when you withdraw your money from EPF. If this rule continues, you may need to plan better and consider partial withdrawal from EPF.

According to the government and finance minister, the idea is to encourage people to invest their EPF money into an annuity or buy pension plans; in that case, the 60% EPF amount will not be taxed, but you must remember that income earned by pension plans or annuity is taxed as income.

So the idea of generating regular income post-retirement for private-sector employees by investing EPF money to buy pension plans is not a great idea, and instead of encouraging people to invest in an annuity, it might discourage peoples to not invest in EPF itself. Let's see some important points about the new EPF taxation rules.

New Employee Provident Fund (EPF) Taxation Rule

As per Indian Budget 2016, new EPF withdrawals will be taxed from 1st April, when the new financial year will be started in India. Remember, India's financial year runs from 1st April to 31st March. Anyway, here are important points about the new EPF tax rules:


1. Only 40 percent of EPF withdrawals are tax-free, unlike 100 percent earlier.

2. 60 percent of EPF withdrawal will be taxed as income if it is not invested in an annuity offered by an insurance company. However, the subsequent regular income from that annuity will be taxed as income.

3. The new EPF taxation rule will apply only to the corpus made with contributions to the EPF accounts after 1st April 2016. The current accumulated corpus and its further accumulation will not be taxed at all


After this announcement, I have talked to my friend, and nobody is happy about it.   Only good thing this new EPF rule has done it that it has forced people to know more about Employee Provident Fund (EPF) and Personal Provident Fund (PPF).

Believe it or not, but many people don't even know how to check EPF balance though you can check it online by logging into EPF website, as shown here. Due to taxation, people are now learning more about how EPF help them to save tax earlier and how EPF withdrawals will be taxed this year.


Even though the government has good intentions to encourage or enforce private sector employees to buy pension plans or annuities to get a regular income post-retirement, instead of withdrawing and spending all of their EPF saving, taxation of EPF money doesn't seem to be the right way to promote this idea.

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