EPF tax might just stop people from investing in properties
A small percentage (10%) of people making EPF withdrawals to buy property are likely to look for other investment options if the proposal to tax interest accrued on 60% of EPF comes through
Salaried people contribute a certain percentage of their salaries to their employee provident fund (EPF) account every month and their employers add 12% to it. An individual is permitted to withdraw the full amount at the time of retirement and partially withdraw during his working life for children’s education, marriage of self, children and siblings, purchase/ construction of a house or any medical emergencies.
The option of EPF withdrawal for purchase/construction of a house is available only once in an individual’s entire working life. The minimum service period for this is five years and the maximum amount that can be withdrawn is 36 times the total salary (for construction of property) and 24 times (for purchase of property). Will individuals, however, be able to get the money for building or buying homes if the new budget proposal of tax free withdrawal of 40% at retirement (58 years) and taxing accrued interest on the remaining 60% is implemented?
A small percentage (10%) of people making EPF withdrawals to buy real estate or pay off their loans are likely to decide against doing so. Suresh Sadagopan of Ladder 7 Financial Advisories points out that if a certain percentage of population wishes to convert 60% of the corpus on retirement into annuity, they may now have to pay tax to get their own money. If they buy a house or pay off a loan using the EPF amount, they are likely to use only the tax free EPF component and use the remaining sum for pension plans.
People are eligible to withdraw a portion of EPF if they have five years of service. Funds equivalent to 24 months and 36 months of salary can be withdrawn for buying a plot and house/apartment, respectively. Five years of service refers to full five years spent with a single or a total of five years with two companies or more.
Technically, a person can avail of 24 months of EPF for five years or whatever is available in his or her account, whichever is less. For example, if a person’s salary is ₹ 20,000 per month, the 12% contribution from the employee is ₹ 2,400 and the employer’s contribution works is ₹ 1,600 . This means ₹ 4,000 per month is the total contribution for the provident fund. The salary for the year works out to be ₹ 48,000 and for five years it amounts to ₹ 2,40,000. Presuming that the interest accrued on EPF account is ₹ 60,000, the corpus after five years in this account will be ₹ 3 lakh. The salary for 24 months in this case will work out to be ₹ 4.8 lakh but the amount a person can withdraw as per the rule for housing purpose will be only ₹ 3 lakh.
The government may come out with a clarification on whether withdrawal of EPF before retirement for a specific purpose will be taxable or not, say tax experts. Also, as per rules introduced last month, if an employee decides to quit and needs to access EPF, he can only withdraw his share and not that of the employer which can