Last year’s budget had capped the tax exemption on employers’ contribution to Provident Fund, NPS and superannuation fund to Rs 7.5 lakh. While that impacted only employees with very high salaries, this year’s proposal has a wider impact. “This is a big change. It will hit high-income salaried people who use the Voluntary Provident Fund to earn tax-free interest,” says Amit Maheshwari, Partner and India Tax Leader, Ashok Maheshwary & Associates LLP.
Addressing a press conference after the Budget, Finance Minister Nirmala Sitharaman said that this new measure will impact barely 1.1% of the total subscribers to the Provident Fund.
This is not the first time that the government has proposed to tax PF money. The 2016 Budget had proposed that the interest accrued on 60% of the EPF be taxed. The proposal was rolled back after a massive outcry against the new levy.
However, the proposal may not face as big a backlash this time because it affects only the creamy layer of salaried employees. The Rs 2.5 lakh annual threshold means that a person contributing up to Rs 20,833 a month to PF (basic salary of up to Rs 1.73 lakh a month) will escape the tax.
At the same time, the new Wage Code which comes into effect on 1 April has laid down that the basic salary must be at least 50% of the total income of the individual. This means the salary structure will have to be rejigged with a higher basic salary, which will automatically increase the contribution to the PF.
The budget plans to close down another tax-free haven for HNIs. Existing rules say that under Section 10(10d), gains from an insurance policy are tax free if the cover is 10 times the annual premium. The budget has proposed to remove the tax exemption to Ulips with a premium of more than Rs 2.5 lakh a year.
The gains will now get taxed like in the case of mutual funds. But the budget has not clarified whether the taxation will be like debt mutual funds or equity mutual funds. It is also not clear whether the Rs 2.5 lakh ceiling is for individual policies or for multiple policies held by a policyholder.
This will not apply to existing Ulips, but only to new policies bought after the budget was announced. While most budget proposals usually come into effect from the next financial year (1 April), this comes into effect immediately, thus closing the window for buying Ulips before the end of the financial year.
