The Hon’ble Finance Minister Nirmala Sitaraman announced modification of the threshold limit for taxability of interest on the provident fund to Rs 5 lakh against Rs 2.5 lakh notified in the Budget 2021 on a conditional basis.
Budget 2021 came with an amendment to the EEE scheme (EEE means all three transactions* are exempt) of the provident fund contribution.
To bring the high-income earners who park bulk amounts in the Provident fund accounts, the income tax department capped the tax-free interest on the PF contribution in EPF and VPF to a maximum of Rs 2.5 lakh per annum.
*Note: Three transactions in EEE are – Payment, Interest, and repayment.
EEE investment Options are:
- ULIP Schemes: ULIPs or Unit Linked Investment Plans are life insurance plans with a wide range of investment features. Some of the most unique ULIP features include multi-fund allocation, automated portfolio management, and goal safety. ULIPs are also the best investment scheme for long-term investors. ULIPs like Invest 4G from Canara HSBC OBC Life, offer free bonus units to investors who keep investing for more than five or ten years.
- Public Provident Fund (PPF): PPF is one of the safest investment options for long-term investors. The return on the PPF account is safe but linked to market rates. The Employee Provident Fund Organisation (EPFO) declares the rate of return on PPF investments at the beginning of the financial year.
- Equity Linked Savings Scheme (ELSS): Equity-linked savings schemes are one of the two ways you can save tax while investing in equity markets. The other one is ULIP plans.
Although, RGESS was also there offering tax savings. But the scheme only benefits the first-time equity investor. So, not apt for long-term investors.
ELSS, on the other hand, works for everyone, and you can invest over multiple years. So, if you plan to invest in equities while enjoying tax benefits, ELSS would be your go-to investment option. Every investment in the ELSS scheme has a 36 months lock-in period.
- Guaranteed Savings Plan: Guaranteed savings plans are another offering from life insurers in India. Guaranteed plans, as the name suggests, guarantee a minimum return on the investment.
When it comes to protection benefits, these plans are very similar to ULIPs. For example, you can protect your goal value in guaranteed plans, where the insurer will invest the remaining premiums on your behalf in case of your untimely demise.
While the returns are guaranteed, with insurance you can ensure that even the maturity value is guaranteed to your family. Thus, for important family goals like a child’s education, these plans could be the best investment schemes.
In a recent announcement made by the Finance Minister, the interest exemption limit of provident fund contribution is now increased to Rs 5 lakh from Rs 2.5 lakh.
This increase in the exemption limit will be allowed only on one condition that the contribution does not include the employer’s contribution beyond the statutory limit of 12 percent of the basic pay.
In most cases, an employer deducts PF contribution from the employee’s salary and adds an equivalent amount to the employee’s provident fund corpus subject to the basic pay of Rs 15,000 per month. In such cases, the limit of interest exemption remains unchanged to Rs 2.5 lakh.
For contributions that an employee solely makes to his account, the exemption ceiling limit is raised to Rs 5 lakh. This amendment will become applicable from April 1, 2021.
The increase in exemption limit to Rs 5 lakh will benefit mainly the government employees, as they contribute to the statutory and central provident fund. For the private sector, where both the employee and employer contribute jointly, the ceiling limit will remain Rs.2.5 lakh.
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Nirmala Sitharaman added that the ceiling limit would not impact the small and medium taxpayers, and they will continue to earn tax-free interest on their contributions. More than 90 percent of the individuals will fall within the limit of Rs 2.5 lakh.
In the previous 2020 Budget, the finance minister had also applied for a cap limit for tax exemption on employers’ contribution to PF, NPS, and superannuation funds at an aggregate of Rs 7.5 lakh per annum.