The finance minister presented the Union budget for 2021 today. Here are the main highlights.
# 1 Income Tax Slabs remain unchanged
No changes were made to the income tax plates. No additional tax breaks were announced either.
# 2 EPF interest becomes taxable in certain cases
Current regulation: Interest on your contribution to the EPF account is exempt from income tax.
Proposed change: If you contribute more than Rs 2.5 lacs to your EPF in a fiscal year, the interest earned on the excess amount will be taxed at your ceiling rate.
For example, if you deposit Rs 3.5 lacs per year into your EPF account, the interest earned on Rs 2.5 lacs is tax free. The interest on the excess amount is added to your income and taxed accordingly.
Points to note
- This only applies to your contribution to the EPF. This does not apply to your employer’s contribution to your EPF account.
- The new regulation only applies to contributions made on or after April 1, 2021. Therefore, the tax rule for contributions made by March 31, 2021 will not change. The interest on these contributions (until March 31, 2021) will remain tax-free in the future.
Note that the government has changed the tax rules related to the employer contribution to your retirement accounts in the 2020 budget. If your employer accumulates more than Rs 7.5 accumulated in your EPF, NPS or retirement accounts, the excess over Rs 7.5 will be added to your income and taxes accordingly. In addition, the income (interest or earnings) that the employer earns from such a surplus contribution has also been made taxable.
What’s the effect?
Of course, if your EPF contribution is more than 2.5 rupees per year, you have a problem.
Rs 2.5 lacs per year is roughly Rs 21,000 per month. If your EPF contribution (just your own and not the employer) is more than Rs 21,000 per month, this rule change is an adverse development.
With a contribution of 12%, a base salary of 1.75 rupees per month would result in a monthly contribution of 21,000 rupees to EPF.
Now the base salary of 1.75 rupees a month is no small number. So this only affects people with high incomes. Smart move by the government.
The appointment of the Voluntary Provident Fund (VPF) will also decline. Many high-income employees used to be an important contributor to VPF as it provided excellent tax-free returns on a fixed income product. That avenue (or the gap) has now been clogged.
# 3 ULIP taxation on par with Equity Mutual Funds
The 2018 budget introduced a 10% tax on long-term capital gains (LTCG) on sales of stocks / mutual funds (over Rs.1 billion per year).
On the other hand, ULIPs continued to be treated tax-free.
And both equity funds and ULIPs invest in stocks. Different treatment for similar investments.
Injustice to mutual fund companies. Good for insurance companies. And confusion for investors like you and me.
The 2021 budget tries to create a level playing field.
If your annual ULIP policy premium exceeds Rs 2.5 lacs in any fiscal year, ULIP proceeds will not be tax exempt (cannot be exempt under Section 10 of the Income Tax Act). If you have made a profit, that profit is considered a capital gain and is taxed accordingly.
Points to note
- This change only applies to ULIPs purchased on or after February 1, 2021.
- The tax treatment of ULIPs started / purchased by January 31, 2021 will remain unchanged. Premiums paid on the old policies (issued on or before January 31, 2021) do not count towards this 2.5 rupee limit.
- The limit of Rs 2.5 lacs is a cumulative limit and not per ULIP. So if you have two policies, the cumulative premium of two such policies (issued on or after
- The rule doesn’t just apply to maturity proceeds. This also applies to the return of policies and partial withdrawals.
- ULIP’s death benefit is still tax-freeregardless of the amount of the ULIP premium paid. The proposal does not affect the tax treatment of death grants.
- STT also applies to the sale of ULIP equity funds.
What will the effect be?
Technically, ULIP that is not exempted (which cannot be exempted under Section 10) is considered a capital investment.
So keep winning ULIP equity funds (for non-exempt ULIPs) are taxed at 15% (short-term) or 10% (long-term). As far as I know, LTCG for ULIP fund sales will benefit from the LTCG exemption for equity up to Rs 1 lac. Well there is a limit of Rs 1 lac. You can use it for stock funds, stocks, or ULIP stock funds.
If it is a ULIP debt fund (for non-exempt ULIPs) profits are taxed at your slab rate (short term) and 20% after indexation for long term profits.
Note that you may have to sell ULIP fund shares if you switch between different ULIP funds. That will also attract capital gains tax. Therefore, ULIPs can no longer carry out tax-free realignments.
Note that I am still not very sure about some of these aspects of ULIP taxation. Please check with your certification body before making a decision.
Mutual fund companies will welcome this decision. Insurance companies are going to be pretty unhappy. Better tax treatment was part of their sales pitch.
For investors, the answer is more nuanced. I was inclined (or biased) towards mutual funds through ULIPs even before this adverse tax change for ULIPs. This proposed change makes the case for equity funds even stronger.
# 4 Section 80EEA tax benefit extended for homes purchased by March 31, 2022
You are entitled to a tax break of Rs 1.5 on interest paid on a home loan provided that:
- The home loan will be sanctioned between April 1, 2019 and March 31, 2021. The relief has been extended for loans sanctioned until April 1, 2019 March 31, 2022.
- The house’s stamp duty value cannot exceed Rs 45 lacs.
- You should not own a home at the time the home loan is sanctioned.
Note that this relief goes beyond the Section 24 tax benefit (Rs 2 lacs for home loan interest payment).
# 5 Additional changes
- Seniors over 75 years of age do not have to file an income tax return if their source of income is only pension income and interest income
- Imposition of AIDC (Agriculture, Infrastructure and Development Cess) of Rs 2.5 per liter for gasoline and Rs 4 per liter for diesel. From what I’ve read, this won’t have any impact on fuel prices for the time being as excise duties on gasoline and diesel will be reduced. This will likely negate the effects of the recruitment.
- Announcement of the vehicle scrapping scheme. Applicable to private vehicles over 20 years and commercial vehicles over 15 years.
- The tax return reopening schedule has been reduced from 6 years to 3 years.
- Pre-completed forms for ITRs.
Disclaimer: Many important announcements were made in the 2021 Union budget. I have just taken up a few aspects from a personal finance perspective. I am not a tax expert either. There may be an error reading the proposed changes. Check with your auditor before taking action.
Source / Additional Links
Finance Act 2021