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Public Provident Fund, NPS, FD, PF, NSC Withdrawal for Coronavirus Tax Implications: The COVID-19 pandemic has led to a financial crisis. Many companies have cut salaries and even laid off employees. In order to fund their expenses, people now need to withdraw from savings made in various tax-saving deposits such as Public Provident Fund (PPF)/ Employees’ Provident Fund (EPF) accounts, National Pension Scheme (NPS), National Savings Certificate (NSC), fixed deposits, etc. While such withdrawals may be necessary, one needs to be mindful of tax implications, as it may lead to additional tax cost. Let us analyse tax implications of certain popular withdrawals:
Both PPF and EPF falls under exempt-exempt-exempt (EEE) tax regime. An EEE regime means that investments made up to Rs 1.5 lakh in PPF/ EPF in a financial year is allowed as deduction under Section 80C, accumulated interest and payment at the time of withdrawal (including principal and interest) are tax free.
The normal lock-in period for investments in a PPF account is 15 years from year of initial subscription. However, one can make partial withdrawal after expiry of five years, to the maximum of 50% of balance standing at end of fourth year. Secondly, a PPF account holder is also allowed a premature closure of account after expiry of five years if that amount is required for treatment of life threatening diseases.
Similarly, contributions made to EPF have a lock-in period of five years. However, partial withdrawals may be made from EPF account before completion of five years in certain conditions, including a medical emergency. Further, as per relaxations granted by government in light of Covid-19 outbreak, partial withdrawal/ advance from EPF account is allowed up to three months’ basic and dearness allowance or 75% of the balance in the account, whichever is lower.
Permissible withdrawals from PPF and EPF before maturity are exempt from income tax and thus may be considered as a tax efficient option of withdrawing money for use in the present situations, subject to fulfilment of conditions for withdrawal.
NPS also comes with EEE tax status. The scheme matures once an individual turns 60. On maturity, 60% accumulated withdrawal is tax exempt, while balance 40% is required to be invested in annuity (which is also tax-exempt).
Covid-19 has been notified as a critical illness which is life-threatening in nature. Thus, partial withdrawals are now permitted to fulfil financial needs of subscribers of NPS, if required towards treatment of illness including COVID19 of the subscriber or his permitted dependents. Such partial withdrawal, permitted after three years of NPS subscription and not exceeding 25% of total contributions made by the subscriber, shall also be tax free under income tax laws.
Investors planning to sell off their holdings in listed equity shares or units of equity oriented mutual funds should remember that such activity will attract short term capital gains (STCG) tax at 15% and long term capital gains (LTCG) tax at 10% without indexation for LTCG above Rs 1 lakh, based on the period of their holding such shares or units of mutual funds.
On sale of other securities and units of non-equity oriented mutual funds, STCG is taxed at normal tax rate while LTCG is taxed at 20%.
Currently, there is no specific exemption under income tax laws from tax on STCG/ LTCG on sale of securities/ mutual fund units, though taxpayers may claim certain deduction, if they make further investments in specified bonds or assets. However, considering sale proceeds may be required to meet short-term finance requirements, such deduction may not be availed practically.
Interest earned on fixed deposits is taxed in the hands of taxpayers at normal tax rates. Principal amount withdrawn from fixed deposits does not have any income tax implication, though premature withdrawals from fixed deposits may attract some penal charges from the banks or post office.
Thus, taxpayers having investments in various financial instruments must consider tax implications as well as other restrictions on withdrawals, penal charges, etc., while withdrawing funds from their savings. The government may also need to come up with further relaxations in terms of overall cap, penal charges, tax exemption on capital gains, etc., in order to maintain and boost liquidity and to reduce hardship of its citizens.
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