By Shailesh Kumar
The Employees Provident Fund (EPF) program has been one of the preferred investment options for the employed taxpayer. In FY 20, EPF had offered an interest rate of 8.50%, which is well above the interest rate offered by commercial banks for time deposits. Here, too, interest income from investments in EPFs was exempt from income tax with no monetary limit. Thus, EPF was an attractive investment option, especially for higher salary employees who would make additional voluntary investments in EPF in excess of 12% of salary as required by EPF regulations.
Unit-linked insurance plans (Ulips) were another popular investment vehicle for medium-sized taxpayers. Like the EPF, Ulips income / bonuses are exempt from income tax for investors with no monetary limit, making Ulips an attractive investment option. In addition, Ulips offered the opportunity to avail of tax-free returns related to the securities market, which, after deducting the income tax exemption, made it all the more attractive for long-term capital gains from the sale of listed securities.
In the 2021 budget, however, the government proposed to limit the tax exemption for investments by individual taxpayers in EPF or Ulips in monetary terms.
Tax on EPF
The government has proposed that if a person’s investment in their EPF account exceeds Rs 2.5 lakh in a fiscal year beginning on / after April 1, 2021, interest payable on such investment of more than Rs 2.5 lakh are earned, cannot be exempt from income tax. This step affects not only employees who make a voluntary EPF contribution in excess of the mandatory contribution of 12% of base salary, but also high-wage workers whose annual contribution in EPF exceeds Rs 2.5 lakh, even if their contribution is limited to 12% of the base salary. It should be noted that the tax exemption for contributions made by March 31, 2021 will remain in effect even if the annual contribution has exceeded the newly introduced monetary limit of Rs 2.5 lakh in those earlier years.
Steer on Ulips
Similarly, for Ulips, the government has proposed that the income tax exemption permitted under Section 10 (10D) only apply to those policies that were issued on / after February 1, 2021 and whose annual premium or sum of the annual premium is Rs 2.5 lakh does not exceed. It should be noted that the income tax exemption for Ulips continues until January 31, 2021 even if the annual premium in previous years or even in future years exceeds the newly introduced monetary limit of Rs 2.5 lakh in future years.
Taxpayers must consider these new proposed changes to income tax law as they plan their future investments.
The author is a partner of Nangia & Co LLP