Overall this budget has not made major changes to personal taxation. However, few areas to take note are detailed below:
1. Wef 1.Apr.21, interest on EPF + VPF contributions in excess of Rs.2.5Lacs will be charged as interest income similar to FDs – further details are awaited as to whether only the first year’s interest is taxable or future interest that accrues/compounds from this excess contribution would also be taxable (in which case it could become an accounting nightmare for EPF).
Next step – A neater solution would be to prevent or cap employees’ contribution at Rs.2.5L in EPF/VPF each. Similar to government’s move last year that set an aggregate limit of Rs.7.5Lacs for employer contributions to EPF, National Pension System (NPS) and superannuation fund.
Rationale – About 1.1% of EPF account holders who also happen to be very high income earners are contributing lakhs and crores of their income(s) into their EPF & VPF accounts, to earn the highest 8.5% tax free interest. According to the government, this arbitrage is not fair to low income employees who are able to contribute only Rs.20833 p.m towards their retirement. Hence this tax measure does not impact 99% of EPF contributors.
2. All equity/stock market capital gains, interest & dividend income will be auto-populated in ITR forms for ease of tax compliance. The tax department collects data about all financial, real estate and gold investments made by individuals based on PAN numbers. This info would now be pre-filled in the assessees’ income tax returns to help with better tax compliance.
Rationale – A simple and effective way to curb under-reporting & non-reporting by use of technology. It also widens the tax base beyond the salaried class – whether they are from informal sector, self-employed, business owners or even rich agriculturalists.
3. ULIPs are now brought at par with equity mutual funds with regards to taxation, which was a long pending measure. Maturity proceeds from policies with premiums in excess of Rs.2.5Lacs will now be taxed as equity mutual funds (wef 1.Feb.21). This measure plugs the tax arbritrage of ULIPs and prevents mis-selling.
4. For pensioners above 75years of age, there is no need to file ITR – but tax will be deducted by bank. Need to see if the same would happen to all pensioners regardless of age. While this helps seniors from having to file their income tax returns, in case they employ any tax saving instruments under section 80C, they may still have to get help to file their returns and claim refunds.
The EPF tax proposal needs to be watched closely for amendments (or rollback) by 31.Mar.2021.