Know About High PF Contributions and ULIPs after Budget 2021

Tax-efficiency is one of the primary considerations for the majority of investors in India. Keeping this in mind, the Indian government has made sure that there are plenty of tax-efficient investment options for every type of taxpayer. EPF (Employee Provident Fund) and ULIPs (Unit-Linked Insurance Plans) are two such very popular investment options. But the recent Budget 2021 has tightened the tax-efficient provision to some extent, especially for people from the high-income bracket. Here is everything you should know about the new proposal-

Under Section 80C of the IT Act , PF contributions were eligible for tax deductions of up to Rs. 1.5 lakhs in a financial year. Even the interest that you earned on your PF contribution was tax-free. But as per the new Budget 2021 proposal , the interest gains on contributions of above Rs. 2.5 lakhs will be taxable.The rule applies to EPF and VPF (Voluntary Provident Fund) contributions made after 1st April 2021. However, it is still unclear whether the tax will be applicable only on the contribution amount in excess of Rs. 2.5 lakhs or the entire amount contributed in a year.

• Outcome of New 2021 PF Provision It is very common for high-income earners to contribute more than the 80C limit of Rs. 1.5 lakhs in PF as it is low-risk and helps them earn fixed interest. But as gains from contributions of above Rs. 2.5 lakhs will be taxed, it is possible that many of them will look for alternate, more tax-efficient investment options.
• Should You Continue Making Higher Contributions to PF? While the new provision will impact the returns you earn from PF if you make higher contributions, it is still one of the best methods to save for your long-term goals. Unlike post office schemes or bank deposits where the interest rate is linked to the market, PF offers guaranteed returns as fixed and revised by the EPFO (Employee Provident Fund Organization) every year.

The combination of investment and life insurance made ULIPs an excellent choice for a lot of Indians. As ULIPs are an insurance product, the maturity proceeds are tax-free. Even partial withdrawals and early surrenders were exempt from tax under Section 10(10d) of the IT Act of the IT Act. But HNIs often took advantage of this tax provision for gaining indirect equity exposure.Equity investments attract LTCG (Long-Term Capital Gains) tax at 10% if the annual returns are above Rs. 1 lakh. But through ULIPs, which also invest your money in equity, investors are protected against LTCG. However, the Budget 2021 proposal states that the maturity proceeds from ULIPs will not be tax-free anymore.Tax exemption is only available for policies with an annual premium of up to Rs. 2.5 lakhs. The capital gains structure of mutual funds will be applicable on the maturity proceeds if the annual premium of ULIP is above Rs. 2.5 lakhs. This new provision will be applicable to policies purchased after 1st February 2021.

• Outcome of New 2021 ULIP Provision One of the biggest differences between equity mutual funds and ULIPs is the tax-efficiency of the latter. While equity funds attract LTCG, maturity proceeds from ULIPs are tax-free. But this tax advantage has been taken away by the new proposal to some extent.But note that as ULIPs are life insurance products, they are still eligible for standard 80C deductions. Equity mutual funds do not enjoy this benefit unless you invest in ELSS (Equity-Linked Savings Scheme), a type of equity fund. Also, there are no tax implications on the death benefit of a ULIP.
• Should You Purchase ULIP with Higher Annual Premium? ULIPs offer a combination of life insurance and investment. While the new Budget 2021 provision will impact your returns if your annual premiums are above Rs. 2.5 lakhs, the death benefit is still tax-free. If you’ve purchased a ULIP of higher sum assured, your beneficiary will still receive the entire amount tax-free on your unfortunate demise.

As the new provisions have been recently announced, there is still a lot of confusion about their implications. Wait for a few days to get some clarity before making any decision.While the provisions have dented the appeal of PF and ULIP to some extent, they continue to be excellent choices for every type of investor. If you make higher PF contributions or are about to purchase ULIP, it is better to consult a tax professional to understand the implications of the new provisions.Ready to make the most of your money? Start your tax planning journey now!

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.