In the Budget 2021, Nirmala Sitharaman in order to curb the centre's outgo as tax-free interest on EPF has announced a new tax rule for EPF. Accordingly, for high income earners or those contributing a higher sum of over Rs. 2.5 lakh in a financial year will be taxed on the interest earnings. So, for high income earners, this interest on EPF announced annually and at 8.5% currently shall no longer be tax-free.
Note such a tax implication shall arise in case the employee's contribution exceeds the stated threshold.
Rationale given for this new ruling on EPF tax
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," said S Ravi, Former Chairman of Bombay Stock Exchange, Founder & Managing Partner a of Ravi Rajan & Co.
Impact of the new move
To reduce their tax outgo, wealthy individuals who until now parked an extra sum in their EPF kitty or also for that matter made an extra contribution to VPF or voluntary provident fund, they will now look for other investment options to rake in a higher earning that does not attracts a similar tax structure.
This is also a retirement savings scheme that provides pension amount and in the case of maturity, the commutation part offers tax-free income. At the maturity, investor has to decide the commutation percentage which is capped at 60%. Also, it is a known fact that NPS funds have yielded a higher return in comparison to EPF. As per the Cleartax website, the NPS scheme return from central government schemes have been over 12 percent for SBI, UTI Retirement Solution and LIC Pension Fund, respectively.
ELSS is also tax free up to Rs. 1.5 lakh in a year as per Section 80C of the Income-tax Act. Also, LTCG from the instrument are tax exempt up to Rs. 1 lakh. As these funds come with a lock-in of 3 years, you also get a disciplined approach to investing. For some of the funds as in IDFC Tax Advantage one year return have been 12 percent. ELSS - that offers dual advantage of capital appreciation as well as tax saving - has lower lock-in period (3 years) than PF & NPS," said Ravi.