Budget 2016: Tax on EPF withdrawals biggest in Budget

While the withdrawals on your National Pension Scheme (NPS) will now be partly taxfree, the Employees Provident Fund (EPF) will be now be partly taxed, which is bad news for retirees. The FM's proposal for tax exemption on withdrawal's upto 40% of the corpus of the National Pension Scheme (NPS) is welcome.

However, the FM's proposal to bring parity among the different pension schemes will result in a tax on 60% of the withdrawals for contributions to EPF and other schemes made after April 1, 2016. At present, the deposits, the interest and withdrawals of the EPF are tax free as it is an EEE scheme.

It is not clear if the Public Provident Fund (PPF) will also come under taxation but it would need a modification of the PPF Act.

The silver linining is that those earning up to Rs 5 lakh a year will now get a tax relief of Rs 5,000, up from Rs 2,000 previously. This hike in relief effectively raise the basic exemption for these taxpayers to up to Rs 3 lakh.

Those living in rented houses and who do not get any house rent allowance from their employers stand to benefit from the increase in limit of deduction for rent paid from Rs 24000 to Rs 60000 per annum. "The sops offered by the FM will help only a section of tax-payers who are in the low income category,'' points out Arnav Pandya, certified financial planner.

For first time home buyers, the FM is offering a deduction of additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs 50 lakh.

"Another positive move is that the project completion period to claim tax benefits on home loan has been increased to 5 years from existing 3 years,'' said Gaurav Mashruwala, certified financial planner.

Arijit Basu, MD & CEO, SBI Life Insurance welcomed the health insurance of up to Rs. 1 lakh per family and a top up of Rs. 30,000 for people above 60 years. ``People will be more aware of the need for insurance and life insurance companies can capitalize on the same,'' he said.

Also, the tax deducted at source (TDS) on payments from life insurance policies has been reduced to 1% from 2%.

Krishnamoorthy Rao, MD & CEO, Future Generali India Insurance said, ``Setting up 3,000 pharmacies under the government's Jan?Aushadhi Yojana is aimed towards better and easier availability of generic drugs through which the overall health care cost would be pushed downwards.''

"Gold monetisation scheme is expected to get a fillip as the interest and maturity proceeds will be tax free,'' added Mashruwala.

"While there is no dramatic proposal for the small tax payer, but the streamlining of the taxation will help in the long term,'' said Ravi Gopalakrishnan, head, equities, Canara Robeco Asset Management.

It is taxing times for the super-rich. "Those whose annual taxable income is more than Rs.1 crore, they will have to pay additional surcharge @ 15% on their total tax liability as against 12% the previous year,'' said Anil Chopra, group CEO and director, Bajaj Capital.

Hemant Rustagi, CEO, Wiseinvest Advisors said, ``Thanks to the fiscal consolidation, now there is room for the RBI to cut rates. We should expect a rate cut shortly.''

"The annuity in the hands of annuitants will be tax exempt and service tax on single premium annuity schemes has been reduced from 3.5% to 1.4%,'' said Rajesh Sud, executive vice chairman and managing director, Max Life Insurance Company.