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Tuesday, March 9, 2021

Budget: Hit those who deposit more than Rs 2.5 lakh in PF, now they have to pay tax

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New Delhi: Tax savers have been hit hard by depositing more money in PF. Good earners have so far used PF as a tax-free haven but that exemption has been scrapped in the budget. The interest earned on depositing more than 2.5 lakh provident funds in a year is now tax deductible. This will have a direct impact on high-income earners who used the Voluntary Provident Fund for tax-free interest earners.

This is not the first time the government has proposed a tax on PF rupee. It was also proposed in the 2016 budget that the interest earned on 60 per cent of the EPF be brought within the tax limits. However, there was widespread opposition to the new tax and the proposal had to be withdrawn.

The 2021 budget proposes to remove tax evasion at a premium of more than Rs 2.5 lakh a year under Section 10 (10D) of the ULIP. However, this will not apply to the current ULIP only for policies sold after 1 February this year.

The biggest effect of this will be on the creamy layer. This time the outcry against the proposal may be lessened as it may affect only the creamy layer in the payroll. To put it this way, the annual limit of Rs 2.5 lakh means that if you deposit Rs 20,833 per month in PF (basic salary up to Rs 1.73 lakh per month), you can avoid taxes.

On the other hand, a new wage code is to come from April 1 which stipulates that the basic salary should be at least 50 per cent of a person’s total income. This means that with a higher basic salary the structure will change and the contribution to PF itself will increase.

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