To curb wealthy persons from parking excess income in Provident Funds (PFs) to earn greater tax-absolutely free interest, Finance Minister Nirmala Sitharaman has announced in the Union Budget 2021-22 that PF contributions more than Rs 2.5 lakh in a monetary year will be taxable from the next monetary year.
“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 interest PF contribution more than Rs 2.5 lakh would not impact 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.
Tax on Provident Fund interest: Will interest on PPF, GPF, CPF contributions also become taxable?
However, with the interest on excess contributions to be added to their earnings, wealthy PF contributors would now shift their investments to other option alternatives to cut down tax liabilities.
“This measure will act as an inhibitor and drive investors to other viable investment opportunities,” stated Ravi.
Here are some other viable investment alternatives:
National Pension System (NPS)
With the commutation element on maturity now tax absolutely free, NPS is a excellent option for pension seekers.
The wide investment alternatives also make it appropriate for each aggressive and conservative investors.
“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 a excellent tax-saving investment selection particularly for equity investors. On redemption, 10 per cent capital obtain tax is levied on obtain more than Rs 1 lakh in a monetary year.
“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.