PremiumProvident Fund (PF) has been one of the most popular avenues for salaried people to build a retirement corpus, as both employer and employee contribute at a certain percentage of salary. The employee’s contribution to PF is deductible up to ₹150,000 under Section 80C of the Income Tax Act, 1961.
Any accumulated balance due and becoming payable to an employee participating in a recognised provident fund, on retirement along with interest is treated as tax exempt under the Act, provided the employee has rendered continuous service of 5 years or more.
The Budget 2021 has proposed an amendment to this provision that any interest income accrued during a previous year in the PF, to the extent it relates to employee’s contribution exceeding ₹2.5 lakh in a previous year would be taxable in employee’s hands. The purpose of this proposed amendment is to restrict the tax free interest benefits to high-income individuals.
Important to note that Finance Act 2020 had amended definition of salary to provide that employer’s contribution to provident fund in excess of ₹7.5 lakh and interest thereon would be considered as a taxable perquisite for employees.
This current amendment would further impact the retirement corpus since the returns on PF would not be completely tax free on a going forward basis. Such interest income would be taxable at applicable slab rates vis-à-vis beneficial tax rates of 10% or 15% in case of other capital market investments.
Considering this, the individuals need to analyse each and every option of investments /savings from a tax perspective to ensure maximum returns and maximum disposable funds in their hands at the time of retirement.
Investment in stock market and mutual funds
The Budget 2021 has proposed a significant amendment by bringing Unit Linked Insurance plans (ULIPs) under tax bracket. Presently, the redemption of ULIPs is tax exempt provided the total premium payable for the policy does not exceed 10% of the assured sum.
However, the budget 2021 has proposed to tax the redemption value of ULIPs issued on or after 1 February 2021 wherein the annual premium payable by the individual exceeds INR 2.5 lakh. Such ULIPs are proposed to be treated as ‘capital assets’ liable for capital gain taxation at par with equity oriented mutual funds.
This amendment will impact the investment planning of high net individuals (HNI) given that ULIPs will now be at par with other equity oriented mutual funds. The market will see a shift in investments from ULIPs to equity oriented funds.
The investors at this stage need to carefully evaluate the other factors before choosing any of the market linked investment options like liquidity, applicability of exit load, flexibility to switch from equity to debt plan or vice-versa, lock-in period etc. Also, the proposal to tax interest income from PF funds would also lead to diverting investments from PF funds to other market linked investments wherein the tax rate is as low a 10% on long term capital gain as compared to applicable slab rate tax.
(Akhil Chandna is Associate Partner at Grant Thornton Bharat)
_1618917791644_1653793534714.jpg "Savings accounts with 7% interest rates")
