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

HT Estates - - HTESTATES - Van­dana Ram­nani

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

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