Hello Readers! 

The Union Budget for the Fiscal year 2021-22 was announced on 1^st February 2021, by Finance Minister Smt. Nirmala Sitharaman. Financial Experts expressed that Finance Minister has stood with her promises and had given a budget that is completely growth projecting in the coming years.

Every section of society was eagerly waiting for the Budget, to see what benefits they are going to get especially at this time of the pandemic. More of the hopes were from the budget was from the salaried section of this country. In last some Union Budgets, the salaried population of this country has hardly received any benefits. However, this year they have got a place in the budget, and this time government came up with some measures in the Union Budget 2021, that will have implications for salaried taxpayers in the long-term.

Let us understand these measures one by one, briefly!

Tax On EPF Interest For High Contributions From Employees!

Employers Provident Fund, a fund where people have been putting a good amount per year just in order to earn tax-free interest on it. In the new budget, the government has introduced a tax on the interest, for employee contributions of more than 2.5L towards EPF.

It means that if anyone puts Rs. 50K per month into EPF, which adds up to Rs. 6 lakhs, per year then that person can earn tax-free interest only up to 2.5 lakh of investment, rest s. 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.

As per the source this all scenario is likely to be accessed in the form of TDS (Tax Deduction At Source) and add it to the interest you will see in your Form 26AS so that tax recognition is automatic.

Understand the chronology: 

First, the government introduced a new wage code that stated, “50% of the total gross income is considered as basic salary”. This ensured that employees now cannot restructure the salary to lower the non-allowance part.

The EPF is calculated based on the gross income. Now they introduced a tax on interest on employee contribution of EPF above 2.5L.

Both the wage code and the new tax law for EPF will be applicable from 1^st April 2021.

Well, it was long before predicted that EPF tax will be back when they tried to tax it few years before but had to withdraw their decisions. The good part of this new law is that they are taxing at least the “compounding” part of EPF.

Employee Will Be Penalized For Malpractice!

Employers often deduct employee contribution towards EPF but do not deposit these amounts within the specified time. This way had an ultimate loss to the employee in the form of interest.

In order to stop these losses, in the new budget government has decided any late deposits of employee’s contribution by the employer will not be allowed as a deduction to the employer. That means the employer has to then effectively pay tax on any amount that they file late!

Relaxation To Employees With Retirement Accounts Abroad!

Employees who work abroad often face a problem with their corpus created for retirement when they return to India. Take the example of an employer working in the US. The person created a corpus in 401K in the US, by buying 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. However, they apply a tax only when the person actually takes money out of the account (usually after retirement). 

If the investors move to India, their corpus will be taxed in any kind of accrual. Because we don’t recognize the concept of a retirement account. 

If we analyze we can conclude that the person is taxed double time, first on an exit basis in the foreign country & second on an accrual basis in India. To solve this issue, the government in the new budget stated:

• If the person has a retirement kind of account in certain countries, they’ll notify – typically those where we have double taxation treaties.
• This account should be specifically maintained for retirement benefits.
• AND, if this account is taxable on exit in that specific country.
• Then, the same account is not taxable on an accrual basis in India.
• On exit, of course, the foreign country taxes the money – which, if their tax rate is lower than India’s, will see the rest taxed in India.

Keep reading for more updates on Budget 2021!

For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.

Happy Investing!

(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).