Finance
Minister Nirmala Sitharaman has announced in the Union Budget 2021-22 to levy
income tax on interest earned on employee's contribution towards the Employee
Provident Fund, or EPF, if the sum is above Rs 2.5 lakh a year starting 1 April
2021.
his has created confusion amongst people
regarding whether they should continue contributing towards a voluntary
provident fund (VPF) that earns the same interest as that of EPF and enjoys the
same tax treatment. Earlier the contributions were taxable and the interest
earned thereon was exempt from tax
Who can invest?
Voluntary
Provident Fund is an extension of the Employees' Provident Fund (EPF).
Only those
salaried employees who have an active EPF account and regularly contribute
towards EPF can put money in VPF
It is being
said that those who invest heavily in VPF need to change their strategy after
this rule has been changed in the Budget.
To know-how
much, we can invest in VPF without attracting tax on EPF interest, we need to
reduce the mandatory contribution to EPF from Rs 2.5 lakhs.
Starting from April 1, 2021, interest earned on
contributions made towards Employee Provident Fund (EPF) shall be taxable in
the hands of the employee. Such interest is taxable provided the contributions
are more than Rs 250,000 (Rs 500,000 where contributions are not made by
Employer).
In addition
to EPF, it is common for individuals to contribute voluntarily towards PF
(VPF). The limits for taxation as stated above is determined after considering
the aggregate of EPF and VPF contributions.
It may be
noted that the individual can still avail tax deduction subject to a ceiling of
Rs 150,000 under section 80C on PF contributions. Considering this fact and the
rate of interest the government offers, individuals can continue to contribute
towards VPF
As soon as
total investment in EPF and VPF reaches Rs 2.5 lakh, go for PPF, where we will
receive high interest than the post-tax return of EPF.
If we still want to invest more after exhausting
the Rs 1.5 lakh PPF limit, then we can invest in VPF.
EPF comes
with a guarantee so it is still the best-fixed investment option after PPF for
high salary earners.
Even after
being taxed at 30%, a person will earn interest at the rate of 5.95%, which is
more than post-tax returns of traditional instruments such as bank FD.
Suppose a person is contributing Rs 5 lakh towards EPF and VPF combined then the tax liability
will be around Rs 6,375 (30% of 8.5% of (5 lakh minus 2.5 lakh)) for the year
for the person in the highest tax bracket. Therefore, it will make sense to
continue investing in VPF for long-term debt investments.
"For those in the higher tax bracket, VPF
will remain a good option within the debt category.
New PF tax rules: Should your VPF contribution be deducted?
Finance Minister Nirmala
Sitharaman has announced in the Union Budget 2021-22 to levy income tax on
interest earned on employee contributions to the Employees Provident Fund or
EPF, if the amount is above Rs 2.5 lakh per annum from April 1, 2021.
There is confusion among the
people as to whether he should continue to contribute to the Voluntary
Provident Fund (VPF) which earns interest like EPF and enjoys the same tax
treatment. Earlier, the contributions were taxable and were exempt from
interest rate tax
Who can invest?
The Volunteer Provident Fund
is an extension of the Employees Provident Fund (EPF).
Only salaried employees who
have an active EPF account and regularly contribute to the EPF can deposit
money in the VPF
Does your VPF investment strategy need to change?
That being said, after the rule change in the budget, those who invest more in VPF need to change their
strategy.
To know how much, we can invest in VPF without attracting tax on EPF interest, we have to reduce the mandatory contribution of EPF from two and a half lakhs.
From 1 April 2021, the
interest earned on the contribution of the Employees Provident Fund (EPF) will
be taxable to the employee. Contributions exceeding Rs. 250,000 (where
contributions are not paid by the employer) if such interest is taxable.
In addition to the EPF, it is
common for individuals to voluntarily contribute to the PF (VPF). The tax
threshold is determined as described above after considering the sum of EPF and
VPF contributions. It may be noted that the individual can still avail of tax
exemption subject to a ceiling of Rs 150,000 under Section 80 of the PF
Contribution. Given this reality and the interest rates offered by the
government, individuals can continue to contribute to the VPF.
With the total investment in
EPF and VPF reaching two and a half lakhs, go to PPF, where we will get more
interest than the post-EPF tax return.
If we still want to invest
more than the Rs 1.5 lakh PPF limit, we can invest in VPF.
PDF comes with a guarantee so
for high-paying earners, it is still the best-stable investment option after
PPF.
Even after levying 30% duty, a person will earn interest at the rate of 5.95%, which is higher than the post-tax return of traditional liquid instruments like Bank FD. Suppose a person contributes Rs. 50 lakhs to the combination of EPF and VPF but the tax liability will be Rs. 3 (Rs. , Will continue to invest in VPF for long term debt investment.
