The impact of EPF taxation

If one thing is sweet, then extra of it should be higher, proper? Possibly not at all times, however it is a agency perception of EPF followers in India. For lengthy, contributing further to EPF than the requirement was customary observe amongst salaried people. This further contribution was not matched by the employer, nor did it present any sort of a tax break on the invested quantity. Nevertheless, in each different method, it was not a foul deal. The curiosity earned was not taxable, the speed was at all times excessive in comparison with alternate options, and there was an efficient sovereign assure on the cash. The lock-in was onerous, however given the excessive and tax-free rate of interest, it was a superb trade-off.

Now, from this 12 months onwards, the story has modified. Those that routinely get an extra-large EPF deduction want to concentrate. From this 12 months onwards, the tax-free curiosity revenue is offered solely until an annual EPFO deposit of Rs 2.5 lakh. If there is no such thing as a employer contribution, the restrict will probably be Rs 5 lakh. For an annual contribution above that restrict, the curiosity earned will probably be added to your taxable revenue, identical to every other deposit. As with banks and different deposits, TDS will probably be deducted quarterly. To implement this, from this 12 months, the EPFO will preserve two separate accounts for all these members who, to any extent further, contribute greater than Rs 2.5 lakh in anybody 12 months. A type of accounts will proceed to function usually as EPF accounts at the moment do. On the identical time, the opposite will probably be taxable from which TDS will probably be deducted and the place the taxable a part of your stability and its curiosity revenue will accumulate.

To any extent further, this a part of the EPF is simply one other deposit with (in the meanwhile) a considerably greater rate of interest than banks or different deposits. The opposite damaging a part of the EPF, the lengthy lock-in, turns into extra related. This modifications the EPF equation fully. Let’s examine precisely how a lot it modifications. Let’s take an instance by which you contribute Rs 3 lakh a 12 months to the EPF over and above the Rs 2.5 lakh restrict. Let’s additionally assume that the rate of interest from right here on is 8 per cent and that your marginal tax fee is 30 per cent. So yearly, you’ll earn 8 per cent in your collected quantity and pay 30 per cent of that incomes as revenue tax. To simplify our instance, I am contemplating the complete annual influx and tax in a single occasion – that is not the way it occurs however will suffice for my argument.

Had this Rs 3 lakh a 12 months gone into non-taxable EPF, it could have collected to Rs 1.48 crore in twenty years. Nevertheless, within the taxable account, with the above circumstances, it would accumulate solely to Rs 1.12 crore. Steady taxation implies that the true post-tax inside fee of return is simply 5.62 per cent. Does that sound like a superb deal to you? A deposit with a decades-long lock-in with a return of 5.62 per cent a 12 months? Me neither.

So what do you have to do? This is a heretical concept? As an alternative of a taxable EPF account, why not make investments this cash in an fairness fund? You may select a conservative large-cap fund or maybe a Sensex or Nifty ETF. In fact, there can be volatility, however over twenty years, it could all get evened out. The returns would nearly actually be higher. Let’s run the identical calculation however let’s assume that the twenty years are exceptionally damp for fairness and the returns are additionally the identical 8 per cent. Let the one distinction be the taxation.

On this case, with the identical inflows, as an alternative of Rs 1.12 crore, you’d find yourself with Rs 1.39 crore! Bear in mind, in an fairness mutual fund, the cash would accumulate with out taxation and can be taxed as soon as, on the finish, when it’s withdrawn, and that too at solely 10 per cent. The true inside fee of return right here can be 7.48 per cent! In fairness, twenty years of uninterrupted accumulation with only one taxable occasion implies that 8 per cent will get diminished to 7.48 pe rcent. And in actuality, you’d get a far greater return in fairness anyway.

Taxability makes an additional contribution to EPF a extremely questionable concept. I do not suppose anybody studying the above rigorously would wish any extra convincing.

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