Interest earned on PF contribution above Rs 2.5 lakh per year to be taxable
The Budget also proposed to remove the tax exemption available under Section 10(10d) to Ulips with a premium of more than Rs 2.5 lakh per year.
Presently, any payment received by an employee from his provident fund account is fully tax-free. The same may be received either as partial withdrawal as permitted under the scheme or one received after retirement. The payment received from the provident fund comprises of contribution made by the employer and the employee as well as the interest accrued on the contributions.
As per the current laws, 12 per cent of the basic salary (can be capped at Rs 15,000) is contributed by the employee to his EPF account. The employer makes a matching contribution. Out of employer’s contribution, 8.33 per cent goes into EPS. Also, the EPS contribution is calculated on a basic pay of Rs 15,000 or actual basic pay whichever is less. Therefore, if basic exceeds Rs 15,000, then EPS contribution will be calculated as 8.33 per cent of Rs 15,000 which is Rs 1250 per month.
What is the proposal and what are its implications?
Union Finance Minister Nirmala Sitharaman on Monday announced the Budget 2021, her third budget overall. The Finance Minister kept the income tax slab intact, much to the disappointment of the common man. However, she also made an announcement regarding the interest earned on provident funds. The Budget for the fiscal year beginning April will now make interest on employee contributions to PF above Rs 2.5 lakhs per annum taxable effective April 1, 2021.
So, what does that mean for common man, how does it affect their savings and does it have any repercussions on them too? These are the questions that must be on everyone’s mind right now.
“Well, understand this, the number of people who actually contribute more than Rs 2.5 lakh is less than 1 per cent of the total number of contributors in the EPF,” reported DNA quoting Expenditure Secretary T V Somanathan. Therefore, one thing is sure average common man do get affected by this move of the Finance Minister.
The budget plans to close down another tax-free haven for HNIs. Existing rules say that under Section 10(10d), gains from an insurance policy are tax free if the cover is 10 times the annual premium. The budget has proposed to remove the tax exemption to Ulips with a premium of more than Rs 2.5 lakh a year.
Such Ulips will now be treated like equity mutual funds, with gains of over Rs 1 lakh taxed at 10%. It is important to note that this Rs 2.5 lakh ceiling is the aggregate premium for all policies held by a policyholder, which means one cannot get past the tax by investing in multiple policies of less than Rs 2.5 lakh.
Employees’ Provident Fund Organisation (EPFO) has over six crore subscribers. Even Finance Minister Nirmala Sitharaman had said that the Employees’ Provident Fund (EPF) is aimed at the welfare of workers and any person earning less than Rs 2 lakh per month will not be affected by the Budget proposal.
The move is to restrict ‘super rich’ who try to take advantage of this fund.
“We are not reducing any workers right. But at the same time, getting tax exemption and 8 per cent rate of interest for somebody who puts Rs 1 crore into the account, we thought it may not be correct. And therefore, we have put the ceiling,” FM added.
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