New Delhi: Nirmala Sitharaman’s Budget and the looming new Wage Code might take a toll on the financial well-being of the middle-class taxpayers as their take-home salary and retirement savings are expected to be hit from April 2021. While presenting the Union Budget, Sitharaman yesterday announced that interest on employee contributions to the provident fund (PF) above Rs 2.5 lakh per annum would be taxed from April 1, 2021.
“In order to rationalize tax exemption for the income earned by high-income employees, it is proposed to restrict tax exemption for the interest income earned on the employees’ contribution to various provident funds to the annual contribution of Rs 2.5 lakh,” Sitharaman said in her Budget 2021-22 speech.
What’s the news?
As of now, returns on investment of any amount in voluntary PF and EPF was tax-free.
But with this amendment, return on investment exceeding Rs 2.5 lakh a year will be treated as income in the investor’s hand and will be taxed at the time of withdrawal.
As per a report in The Times of India, this portion will be taxed at the rate at which the investor’s income is taxed.
Who will be impacted?
Earlier last year, Parliament had passed Code on Wages, 2019, which aimed at raising employee’s contributions to PF. Now, after the presentation of Budget 2021, the interest earned by the PF contributions (above Rs 2.5 lakh annually) will be added to the taxable income, leaving an employee with lesser take-home and retirement savings.
If an individual earns Rs 1 lakh monthly then his minimum basic salary would have to be Rs 50,000 as per the new wage rule from April 1, 2021. So, the employee’s monthly PF contribution will be Rs 6,000 means his annual PF contribution will be Rs 72,000.
Now, in the case of investing up to Rs 2.5 lakh in PF account, here are the numbers. An employee who invests Rs 20,833 per month in PF account will have a monthly basic salary of Rs 1,73,611. Since, it is the basic salary, which should be a minimum of 50 per cent of the net monthly income to be taxable, the monthly salary of the employee will be Rs 3,47,222.
What Experts Say
Speaking to India.com, Investment guru Jitendra Solanki said that PF contribution is basic of an individual’s monthly salary, so the move will impact only those who are drawing Rs 2 lakh salary per month. Elaborating further, he asserted that people are investing more in PF to take the advantage of the tax-free interest they are earning. Hence government wants to curtail that.
Echoing similar remarks, Pankaj Mathpal, MD at Optima Money, while speaking to Zee Business, said, “The Modi Government move won’t affect the middle-class income group because for paying income tax on the PF interest, one needs to pay above Rs 2.5 lakh per annum in a PF account.”
“This is a big change. It will hit high-income salaried people who use the Voluntary Provident Fund to earn tax-free interest,” Economic Times quoted Amit Maheshwari, Partner and India Tax Leader, Ashok Maheshwary & Associates LLP as saying.