The draft Direct Taxes Code, released by the government on Wednesday, proposes to tax all
withdrawals from retirement schemes, but raises the exemption limit on savings to Rs 3 lakh from the present Rs 1 lakh.
However, contributions to short term investment schemes including insurance, mutual funds and fixed deposits will no longer get exemption if the code is accepted by the Parliament.
Under the existing norms, investments in certain instruments like public provident fund, employees provident fund and government provident fund are not taxable at all the three stages — at the time of investments, the amount is deducted from your taxable income, during the period of investment when interest accrues it is not taxed and at the time of withdrawal too no tax is payable.
This is what in tax jargon is called the exempt-exempt-exempt (EEE) treatment, which will now change to EET, meaning the last stage will be taxed.
There is an important caveat here. The tax exempt status currently available to withdrawals would continue to apply to amounts accumulated in post-retirement savings schemes like PPF and EPF up to March 31, 2011. In other words, only money that accrues after that date will be taxed on withdrawal.
For instance, if your PPF account has a balance of say Rs 10 lakh on March 31, 2011 and that grows to say Rs 25 lakh a few years, later thanks to your contributions and the interest adding up. When you withdraw this Rs 25 lakh, you will pay tax only on the Rs 15 lakh that has accumulated from April 2011.
This change in the treatment of savings means that post-retirement annuity schemes would become very attractive, since they do not involve lump-sum withdrawals after retirement.
The EET mode of taxation, the code said, would encourage long term savings by the people. All post-retirement savings, the code stipulates, would have to be in specified retirement accounts held with permitted savings intermediaries who would have to be approved by the Pension Fund Regulatory and Development Authority (PFRDA). On the face of it, this seems to pose a serious challenge for insurance firms.
withdrawals from retirement schemes, but raises the exemption limit on savings to Rs 3 lakh from the present Rs 1 lakh.
However, contributions to short term investment schemes including insurance, mutual funds and fixed deposits will no longer get exemption if the code is accepted by the Parliament.
Under the existing norms, investments in certain instruments like public provident fund, employees provident fund and government provident fund are not taxable at all the three stages — at the time of investments, the amount is deducted from your taxable income, during the period of investment when interest accrues it is not taxed and at the time of withdrawal too no tax is payable.
This is what in tax jargon is called the exempt-exempt-exempt (EEE) treatment, which will now change to EET, meaning the last stage will be taxed.
There is an important caveat here. The tax exempt status currently available to withdrawals would continue to apply to amounts accumulated in post-retirement savings schemes like PPF and EPF up to March 31, 2011. In other words, only money that accrues after that date will be taxed on withdrawal.
For instance, if your PPF account has a balance of say Rs 10 lakh on March 31, 2011 and that grows to say Rs 25 lakh a few years, later thanks to your contributions and the interest adding up. When you withdraw this Rs 25 lakh, you will pay tax only on the Rs 15 lakh that has accumulated from April 2011.
This change in the treatment of savings means that post-retirement annuity schemes would become very attractive, since they do not involve lump-sum withdrawals after retirement.
The EET mode of taxation, the code said, would encourage long term savings by the people. All post-retirement savings, the code stipulates, would have to be in specified retirement accounts held with permitted savings intermediaries who would have to be approved by the Pension Fund Regulatory and Development Authority (PFRDA). On the face of it, this seems to pose a serious challenge for insurance firms.
