The Finance Minister presented the Union Budget 2021 today. Here are the key highlights.
#1 Income Tax Slabs remain unchanged
No changes have been made to the income tax slabs. No additional tax benefits have been announced either.
#2 Interest on EPF becomes taxable in certain cases
Current Regulation: Interest on your contribution to EPF account is exempt from income tax.
Proposed change: If you contribute more than Rs 2.5 lacs to your EPF in a financial year, then the interest earned on the excess amount will be taxed at your slab rate.
For instance, if you contribute Rs 3.5 lacs per year to your EPF account, then the interest earned on Rs 2.5 lacs will be exempt from tax. The interest on the excess amount will be added to your income and taxed accordingly.
Points to Note
- This applies to only your contribution to EPF. This does not apply to your employer’s contribution to your EPF account.
- The new rule shall apply to only those contributions made on or after April 1, 2021. Therefore, there is no change in tax rule for those contributions made until March 31, 2021. The interest earned on such contributions (made until March 31, 2021) shall remain exempt from tax in the future too.
Note that the Government had changed tax rules with respect to employer contribution to your retirement accounts in the Budget 2020. If your employer contributes more than Rs 7.5 lacs cumulative to your EPF, NPS or superannuation accounts, the excess over Rs 7.5 lacs shall be added to your income and tax accordingly. Further, the income (interest or returns) earned on such excess contribution by employer was made taxable too.
What is the impact?
Clearly, if your EPF contribution is more than Rs 2.5 lacs per annum, then you have a problem.
Rs 2.5 lacs per annum is about Rs 21,000 per month. So, if your EPF contribution (just your own and not employer) is more than Rs 21,000 per month, this rule change is an adverse development.
At 12% contribution, a basic salary of Rs 1.75 lacs per month would give monthly contribution of Rs 21,000 to EPF.
Now, base salary of Rs 1.75 lacs per month is not a small number. Thus, this will impact only high earning individuals. Smart move by the Government.
The appeal of Voluntary provident fund (VPF) shall also go down. Many high-income employees used to contribute heavily to VPF since it provided excellent tax-free returns for a fixed income product. This avenue (or the loophole) has now been plugged.
#3 ULIP taxation brought at par with Equity Mutual Funds
Budget 2018 introduced 10% tax on long term capital gains (LTCG) on sale of equity/equity mutual funds (in excess of Rs 1 lac per year).
On the other hand, ULIPs continued to enjoy tax-free treatment.
And both equity funds and ULIPs invest in stocks. Different treatment for similar investments.
Unfair to mutual fund companies. Good for insurance companies. And confusion for investors like you and me.
The Budget 2021 attempts to level the playing field.
If your annual premium towards ULIP policies exceeds Rs 2.5 lacs in a financial year, the proceeds from ULIP will not be exempt from tax (will not qualify for exemption under Section 10 of the Income Tax Act). If you have made a gain, such gain will be considered capital gain and taxed accordingly.
Points to Note
- This change applies only to ULIPs purchased on or after February 1, 2021.
- Tax treatment of ULIPs started/purchased until January 31, 2021 remains unchanged. Premiums paid towards the old policies (issued on or before January 31, 2021) will not count towards this limit of Rs 2.5 lacs.
- 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 2 such policies (issued on or after
- The rule does not just apply to maturity proceeds. It applies to policy surrender and partial withdrawals as well.
- Death Benefit from ULIP will still be exempt from tax, irrespective of the quantum of ULIP premium paid. The proposal does not affect the tax treatment of death benefit.
- STT will also apply on sale of ULIP equity funds.
What will be the impact?
Technically, non-exempt ULIP (that does not qualify for exemption under Section 10) will be considered a capital asset.
So, gains on ULIP equity funds (for non-exempt ULIPs) will be taxed at 15% (short term) or 10% (long-term). As I understand, LTCG on ULIP fund sales will enjoy the exemption for LTCG on equity up to Rs 1 lac. Well, there is one limit of Rs 1 lac. You can use it for equity funds, stocks or ULIP equity funds.
If it is a ULIP debt fund (for non-exempt ULIPs), the gains will be taxed at your slab rate (short term) and 20% after indexation for long term gains.
Note that you may have to sell ULIP fund units when you are switching between various ULIP funds. That will attract capital gains tax too. Therefore, ULIPs will no longer be able to provide tax-free rebalancing.
Note that I am still not very sure about some of these aspects about ULIP taxation. Please check with your CA before taking any decision.
Mutual fund companies will welcome this decision. Insurance companies will be quite unhappy. Better tax treatment was part of their sales pitch.
For the investors, the answer is more nuanced. I was inclined (or biased) towards mutual funds over ULIPs even before this adverse tax change for ULIPs. This proposed change makes the case for equity mutual funds even stronger.
#4 Tax Benefit under Section 80EEA extended for houses purchased until March 31, 2022
You are entitled to tax benefit of Rs 1.5 lacs for interest paid for a housing loan provided:
- The home loan is sanctioned between April 1, 2019 and March 31, 2021. The relief has been extended for loans sanctioned until March 31, 2022.
- The stamp duty value of the house must not exceed Rs 45 lacs.
- You should not own any house on the date of sanction of the housing loan.
Note this relief is over and above tax benefit under Section 24 (Rs 2 lacs for home loan interest payment).
#5 Additional Changes
- Senior Citizens above 75 years of age do not have to file income tax returns if their source of income is only pension income and interest income
- Imposition of Agriculture, Infrastructure and Development Cess (AIDC) of Rs 2.5 per litre on petrol and Rs 4 per litre on diesel. From what I have read, this will not affect fuel prices for now since there is a reduction in excise duty on petrol and diesel. This will likely nullify the impact of cess.
- Announcement of vehicle scrapping scheme. Applicable for personal vehicles over 20 years old and commercial vehicles over 15 years old.
- Timeline for reopening of tax returns reduced from 6 years to 3 years.
- Pre-filled forms for ITRs.
Disclaimer: Many important announcements have been made in the Union Budget 2021. I have simply picked up a few aspects from personal finance perspective. I am not a tax expert either. There may be flaw in my reading of the proposed changes. Check with you Chartered Accountant before taking any action.