- Wealth PMS (50L+)
The salaried have traditionally been hard done by in budgets. Not this time. Three measures in the 2021 budget that have implications for salaried tax-payers:
People have apparently been putting huge amounts into their Provident Fund accounts and getting tax-free interest on it (accumulates in the fund) Now the Government has introduced tax on the interest, only for employee contributions of more than 2.5L towards EPF. This is applicable only for employee contribution & not employers.
Meaning, if you put Rs. 50K per month into EPF, that adds up to Rs. 6 lakh. Only 2.5 lakh can earn interest tax free. The remaining amount – Rs. 3.5 lakh – will earn, let’s say, Rs.28,000 of interest. That “excess” interest will be now added to your income and taxed.
We don’t know the mechanics – but they are likely to deduct tax at source, and add it to the interest you will see in your Form 26AS so that tax recognition is automatic.
‘Aap chronology samajhiye’
We have some bragging rights here. Deepak had predicted long back that EPF tax will be back, after they tried to tax it a few years earlier and backtracked. This is one way now that they are taxing at least the “compounding” part of EPF.
Many employers deduct employee contribution towards EPF, but do not deposit these amounts within the specified time. This is direct loss for employee in the form of interest. In some cases, the employer goes bankrupt which results in a permanent loss of capital as well.
In order to curb these practices the budget stated that, any late deposits of employee’s contribution by the employer will not be allowed as deduction to the employer. Which means the employer has to then effectively pay tax on any amount that they file late!
This is a good initiative. Even though employees do not benefit directly by this rule, it will penalize the wrong practices of employers.
Many employees who work aboard, face issues with accrued income on retirement plans when they return to India. Think of a “401K” in the US. If a person had created a 401K abroad and had bought some stocks or bonds in it, the US does not tax the account when the person sells those bonds and reinvests the proceeds in other things. This is called “accrual”. The US will only tax it when the person actually takes money out of the account (usually after retirement)
But if that person moves to India, any such accrual is taxed. Because we don’t recognize the concept of a retirement account.
Read: A budget wish for a MERA account in India – even India deserves such retirement accounts.
Note that now, the person is taxed on exit basis in the foreign country & also on accrual basis in India. This is effectively double taxation. To solve this:
Overall, the Government seems to have taken decent steps, raising taxes only from the more affluent while fixing double taxation issues. Not tinkering with direct taxes or tax slabs should make the employees happy.