How EEE and EET Tax affect Retirement Investments

 

An important factor while choosing a financial product is its taxation, and for retirement savings, this is even more important as the sums involved are usually life-long savings.

Here's a look at the current tax treatment of three major long-term retirement planning products, which are - Employees' Provident Fund (EPF), Public Provident Fund (PPF) and National Pension System (NPS).

EPF
The tax treatment is EEE, which means your money is exempt from taxes at the time of investment, accumulation and withdrawal. At the time of investment, the tax deduction is under the limit of section 80C of the Income-tax Act, which is currently Rs 1.5 lakh. Partial withdrawals are also tax-free if made after 5 years of continuous service. If withdrawals are made before 5 years of service, 10% tax will be deducted at source. Exceptions have also been provided for transfer of amount and conditions wherein the subscriber is unemployed for more than 2 months or the loss of job was beyond the subscriber's control.

PPF
This product has a long maturity period-15 years. Even after that, the subscriber can extend in 5-year periods. PPF also has an EEE tax treatment. The maximum tax deduction for a financial year is Rs 1.5 lakh. The tax deduction is under section 80C. You can also invest in your spouse's or children's PPF accounts and claim tax deduction, subject to a total deduction of maximum Rs1.5 lakh. Even partial withdrawals, which are allowed only after 6 years, are exempt from tax.

NPS
The NPS, unlike EPF and PPF, is subject to EET- exempt, exempt and tax. Contributions and accumulations are exempt from tax, maturity amount is not. For contributions, apart from the overall Rs1.5 lakh deduction under section 80C, further deduction of Rs50,000 is available under section 80 CCD(1b).

Budget 2017 further removed the tax which was earlier there on partial withdrawals, from 2018-19. Subscribers are eligible to withdraw up to 25% of their contributions from their pension fund accounts under certain circumstances, after 10 years. At maturity, 40% of withdrawal is tax exempt.

The structure of NPS is such that you have to mandatorily buy an annuity with 40% of the corpus. The income from the annuitized portion of the corpus will be subject to tax as per the applicable tax slab. At maturity, you can have up to 60% of this money in a lump sum, but tax exemption will be applicable only on the 40%.

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