Interest on EPF over ₹2.5 lakh a year to be taxed
The budget has proposed to impose tax on investments of high net-worth individuals in different ways. The maturity amount from unit-linked insurance plans (Ulips) with an annual premium above ₹2.5 lakh will now be subject to capital gains tax. Also, interest earned on Employees’ Provident Fund (EPF), Voluntary Provident Fund (VPF) or exempted PF trusts, where the annual employee contribution is above ₹2.5 lakh, will now be taxable.
In a bid to bring the taxation of Ulips on a par with that of equity-oriented mutual funds, the budget has proposed that there will be no tax exemption on the maturity proceeds of Ulips with an annual premium above ₹2.5 lakh.
The rule will apply on Ulips issued on or after 1 February 2021. However, the claim received from such Ulips on the death of the policyholder will remain tax-exempt
According to the Budget 2021, “Under the existing provisions of the Income-tax Act, there is no cap on the amount of annual premium being paid by any person during the term of the policy. Instances have come to the notice where high net worth individuals are claiming exemption under this clause by investing in Ulips with a huge premium. Allowing such exemption in policy/policies with huge premium defeats the legislative intent of this clause.”
However, maturity proceeds up to ₹1 lakh will be exempt. Any returns over that will be taxed at 10%, just like equity mutual funds. Further, securities transactions tax may also be applicable on redemptions from Ulips.
“To provide parity, the non-exempt Ulips shall be provided with the same concessional capital gains tax regime as available to mutual funds. Here, we need to wait and see the details and its impact on the life insurance industry,” said Rakesh Goyal, director at Probus Insurance.
The budget has capped the tax exemption on interest earned on EPF, VPF and exempted PF trusts where annual employee contribution is above ₹2.5 lakh.
High-paid employees contributing large amounts to EPF, VPF or exempted PF trusts will no longer be able to enjoy tax-free interest on their contributions, according to the budget.
“Some employees contribute a higher sum to PFs and enjoy exemption on the entire interest,” said Prakash Hegde, a Bengaluru-based chartered accountant. Employee and employer contribution under the EPF Act is fixed at 12% of the salary. However, employees can voluntarily contribute more than this amount to VPF.
The cap will affect those whose mandatory contribution exceeds ₹2.5 lakh per year or who contribute more than this limit through VPF.