Changes to EPF and ULIP tax rules from the F.Y.2021 |The Union Budget 2021 is hailed as the best budget in recent history. And for a good reason. With its focus on growth and a clear roadmap on how this growth will be achieved and financed, the government seems to have enacted a well-balanced law.
The budget sighed for the taxpayers
as there was no risk with the tax slab or tax rate. However, there was a change
in the tax situation. Although the finance minister did not mention this in his
speech, there is a budget proposal that will change the tax status of two very
famous investment options - EPF and ULIP.
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In this article, we tell you what
these changes are and how they can affect you.
Changes to PF Tax Rules: Cap on
Interest-Free Returns
In the last budget, the government
reduced the amount of tax exemptions on employer contributions in the case of
PF, NPS, and support funds. 5.5 lakhs. Since April 1, 2020, Spiritual Employees
have earned Rs. For EFF contribution (EPF + VPF). Two and a half lakh will be
added to the taxable income and tax will be collected according to the income
tax rate of the person. This will not apply to employer contributions.
In other words, if your total annual
contribution to the Provident Fund exceeds Rs. 2.5 lakh, interest income has
exceeded Rs. 2,000. Two and a half lakhs will be taxable. This margin means
less than or equal to your monthly contribution to the PF. 20,833, your returns
will be tax-free.
This change in the rules has
changed the tax status of PF from EEE (discount-discount-discount) to E-T-E
(discount-taxable-discount). This is the second attempt by the government to
pay taxes to the PF (the first was in 2016, but the proposal was withdrawn after
a huge slogan). This change, as a government, will affect less than 1% of PF
customers.
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However, as soon as the new Wage
Code Bill comes into force, many people will see their contribution to the PF.
This is because, from April 2021, the basic salary must be at least 50% of the
total salary. So the actual effect of this change in the PF rule will only be
known at a later date.
Ulips: Tax equivalent with equity mutual funds
Despite being a market-linked
product, the unit has levied favourable taxes compared to other investment
opportunities such as Linked In plans (ULIPs), mutual funds. Under the current
rules, under Section 10 (10D), Premiums from insurance policies, including
ULIPs, are tax-free if they are 10 times the premium.
As per budget 2021 for ULIPs whose
premium is above Rs. 2.5 lakh a year. For these ULIPs, the amount of maturity
will be taxed equal to the equity mutual fund. This change will take effect on
February 1, 2020, and only applies to new ULIP purchases.
Conclusion:
The purpose of this rule change is to plug specific loopholes used by HNIs to obtain tax-free returns. ULIPs are in terms of points. ULIPs became opaque when spent and despite this had a tax advantage over other investment products. So HNIs used to buy ULIPs with big premiums to earn tax-free returns. With the new rules, if someone invests more than Rs 10,000, this tax benefit will no longer exist. 20 thousand per month. More importantly, however, we believe this is just the beginning and that this limit will be further reduced for ULIPs in the future.
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