To curb rich individuals from parking extra cash in Provident Funds (PFs) to earn larger tax-free curiosity, Finance Minister Nirmala Sitharaman has introduced in the Union Budget 2021-22 that PF contributions over Rs 2.5 lakh in a monetary yr will likely be taxable from the subsequent monetary yr.
“The budget 2021 has placed a strong emphasis on infrastructure development be it social, physical, or financial infrastructure to re-energise the Covid-hit economy. On the direct tax side, changes pertain to simplification of REITS & InVITS and compliance related announcements,” S Ravi, Former Chairman of Bombay Stock Exchange, Founder & Managing Partner a of Ravi Rajan & Co.
“However restrictions have been imposed on tax exemption for the interest earned on the employees’ contribution to various provident funds. Interest earned on employee’s contribution above Rs 2.5 lakh a year will now be taxed as ordinary income. The rationale for introducing the measure is to curtail the practice of parking large sums in the PF account to seek dual benefit of tax exemption and high interest rate,” he added.
According to Ravi, tax on curiosity PF contribution over Rs 2.5 lakh wouldn’t have an effect on majority of PF subscribers.
“The Employees’ Provident Fund Organisation (EPFO) is the world’s largest social security organisations, which maintains close to 193.4 million accounts and considering only a small section make an annual contribution upwards of Rs 2.5 lakh, the measure curbs misuse by them,” he stated.
However, with the curiosity on extra contributions to be added to their earnings, rich PF contributors would now shift their investments to other various choices to cut back tax liabilities.
“This measure will act as an inhibitor and drive investors to other viable investment opportunities,” stated Ravi.
Here are some other viable funding choices:
National Pension System (NPS)
With the commutation half on maturity now tax free, NPS is an efficient various for pension seekers.
The extensive funding choices additionally make it appropriate for each aggressive and conservative buyers.
“NPS is one such option, which provides a better interest rate that PF and tax efficient as well,” stated Ravi.
Equity Linked Saving Scheme (ELSS)
ELSS is an efficient tax-saving funding possibility particularly for fairness buyers. On redemption, 10 per cent capital acquire tax is levied on acquire over Rs 1 lakh in a monetary yr.
“ELSS – that offers dual advantage of capital appreciation as well as tax saving – has lower lock-in period (3 years) than PF & NPS,” stated Ravi.