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Photo: iStock
Photo: iStock

Budget 2021: What high-income earners need to know

Effective 1 April 2021, the exemption on PF interest on employee contributions to PF, would be limited only to the extent the contributions by the employee do not exceed 250,000 in aggregate, during the year

The absence of any changes to the tax rates on the personal tax front under Budget 2021 has indeed given a sense of relief to many high-income taxpayers, who were worried on whether they would be saddled with an additional Covid-related cess or surcharge. However, there are aspects of taxation in the fine print that need to be kept in mind before really heaving the sigh of relief.

Interest on Provident Fund (PF) was considered to be one of the reliable and tax-free avenues of income for the salaried class. Effective 1 April 2021, the exemption on PF interest on employee contributions to PF, would be limited only to the extent the contributions by the employee do not exceed 250,000 in aggregate, during the year. Budget 2020 had already capped the non-taxable employer PF contributions to 7.50 lakhs and had also provided that interest on such contributions which exceed the ceiling of 7.50 lakhs would be taxable. With the current proposal, interest on employee contributions beyond the annual aggregate amount of 2.50 lakhs would also be taxable. Hence, employees would now need to relook at the tax implications of contribution to PF.

Another area where tax implications could arise is on account of investments to Unit-Linked Insurance policies. Currently, an exemption is available for sums received under a life insurance policy, if the annual premium payable on such policy does not exceed 10% of the actual capital sum assured. However, this exemption will not be available in respect of Unit-Linked Insurance policies issued on or after 1 day of February 2021, if the aggregate amount of premium payable in respect of the policy for any year exceeds 250,000. In such case, these ULIPs shall be treated on par with equity-oriented fund and proceeds received on maturity would be taxed as income from capital gains.

The taxpayers would sigh a relief however in case of purchase of a residential house property where agreement value varies with the stamp duty value. Currently, where the individual buys any immovable property and the stamp duty value exceeds the agreement value by 10%, the difference needs to be offered to tax by the buyer. In order to boost real estate demand and provide consequential relief to buyers, the safe harbour threshold has been increased from 10% to 20%. So, an individual buying a residential house property will not be subject to tax unless the stamp duty value of unit does exceeds 120% of the agreement value. However, there are certain conditions to be met such as:

• The transfer of residential unit takes place between 12 November 2020 to 30 June, 2021

• The transfer is by way of first time allotment of the residential unit to any person

• The agreement value does not exceed 2 crores.

In the roadmap to the Budget, there was an ongoing discussion of the introduction of Covid cess. But the government has ensured that most of the government spending is funded by monetisation of assets and disinvestment plan of public sector entities with no significant additional tax impact to high-income earners.

Overall, this budget does provide a sense of relief to high-income earners, who would of course need to be mindful of some details in the fine print.

Saraswathi Kasturirangan is Partner, Deloitte India and Vijay Bharech is Senior Manager with Deloitte Haskins and Sells LLP

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