Investors in the Employee Provident Fund (EPF), Public Provident Fund (PPF) and insurance plans for retirement have a reason to worry. The Direct Tax Code (DTC), meant to replace the existing Income Tax Act, proposes to introduce the exempt-exempt-taxation (EET) regime for all retirement corpuses.

Under the EET regime, all the long-term savings instruments such as EPF, PPF and superannuation funds will be taxed on withdrawal or maturity – a stark difference from the exempt-exempt-exempt or EEE regime, where one gets a tax exemption at all the three stages.

It has also been proposed that all types of insurance policies will come under the purview of EET, except the term policies. Reports suggest the government plans to put up the proposals for discussions next week. For an investor in these traditional instruments, if the EET regime is implemented, there could be a significant change for his/her final corpus because of the tax incidence.

If taxed at existing rates, it could hurt finances quite significantly.

Let’s take an example. An individual retiring with a salary of Rs 20 lakh per annum (under the DTC regime) has to pay income tax at the rate of 20 per cent. Assume he accumulates Rs 1 crore as retirement corpus. His taxable income for the year becomes Rs 1.2 crore. Above Rs 25 lakh, the tax rate rises from 20 to 30 per cent. At the latter rate (without considering any cess), he would lose Rs 30 lakh from the corpus, despite it being a one-time addition to his income.

No wonder tax experts feel a lower rate needs to be used to tax retirement corpuses. “It may be feasible to tax the long-term retirement corpuses at a lower rate to begin with. This will make the transition from EEE to EET easier for tax payers,” said Rajesh Srinivasan, Leader, Global Employer Services, Deloitte India.

While a lower tax rate may be an option, investment options such as PF, PPF and pension schemes have been attractive to investors due to their tax-free nature.

After the implementation of EET, these schemes may not seem as attractive. However, Vikas Vasal, Executive Director, KPMG, does not agree. “In the short term, there may be a negative sentiment amongst investors with regard to these investment options. But, the security these schemes offer will, in the long run, outweigh this negative sentiment.”

There is some small relief. If the individual reinvests this retirement corpus in a government-approved provident or superannuation funds, life insurance policies and the new pension scheme, and withdraws in parts, the tax liability will be only on the amount withdrawn. In other words, instead of paying a tax on the entire amount, smaller withdrawals will ensure lower tax liability. In addition, since these instruments will pay interest on the corpus, some of the liability will get offset.

Also, the DTC proposes to count the return from mutual funds and stocks as part of wealth, while raising the latter’s threshold from Rs 30 lakh to Rs 50 crore. This is likely to increase the attraction of these instruments.

There are options such as including the retirement corpus as a part of wealth because it will only come to the individual once. But, it is felt the government may not opt for this.

More Under Income Tax


  1. R.kumar says:

    to slightly modify my above statement,all accumulations (pf,ppf insurance etc) upto 31/03/2011 shall remain as a tax free lumpsum as on 01/04/2011.
    interest earned on accumulated sums AFTER 1/4/2011 ONLY should be taxed if EET is to be implemented.

  2. R.kumar says:

    the example given above is not clear-
    firstly, suppose a person accumulates a sum say rs 1 crore as in example,that will include his contributions from salary,which is already taxed.only the interest part should be taxed under eet.
    secondly,all contributiond made upto 31/03/2011 under present EEE should remain a taxfree corpus as on 1/4/2011.only the interest earned on it should be under EET.
    this is in line with legal angle and principles of natural justice.
    please reply.

  3. S.Ramaswamy says:

    There are certain things to ponder:

    1. There is a ruling of the Apex Court (Dai Ichi Karkaria) that the benefit accrued cannot be taken away due to the change in the policy.

    It means that the persons who have invested hitherto under the EEE regime, should/can not be transferred to the new regime for that amount invested prior to the EET regime.

    In other words, the amount that is invested post the introduction of the EET regime will have to be taxed under the new regulations.

    Else,it is advisable to withdraw the invested amount prematurely. This will impact not only the social security measures but also the huge corpus of the treasury.

    So, it is humbly suggested to Govt to ensure that any amount invested under the current laws should continue with the exemption at the time of retirement keeping in view the ruling of the Apex Court and the society at large and the exchequer.

    2. DTC should provide that EEE shall continue for all social security measures like the EPF, INsurance, PPF etc.

    3. At the time of retirement, the amount that a person receives is the only amount that he has to survive without any other means. That being the case, these are not be taxed.

    4. Why to invest in these, if it is to be taxed at later stage. It is advisable to pay the tax at the lower rate without investing rather than paying a huge amount at the time of retirement.

    The views are personal.

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September 2021