Budget 2021 May Dent Retirement Savings as PF Interest Above a Certain Limit to Get Taxable

The Union Budget 2021 presented on Monday restricted the tax-free return on investment in provident funds and in unit linked insurance plans (ULIP) at Rs 2.50 lakh each. Both these investment options are used by most middle-class salary earners to build post-retirement savings.

So far, there was no cap on the amount one could invest in ULIP and provident fund to get a tax-free return, and the latter is especially one of the most important saving instruments used to build a retirement corpus by salary earners. The only condition till now was that the annual premium should not be more than 10 per cent of the insurance cover and the minimum lock in period is 5 years in case of ULIP.

Last year’s budget had imposed a ceiling of Rs 7.5 lakh a year on employers’ contribution to provident fund schemes. Now contributions of over Rs 2.5 lakh a year to employee provident fund schemes will be taxed at the time of withdrawal.

“Instances have come to the notice where some employees are contributing huge amounts to these funds and entire interest accrued/received on such contributions is exempt from tax under clause (11) and clause (12) of section 10 of the Act,” said the Finance Minister during her Budget speech.

The move to make PF returns taxable also comes at the same time that the governemnt is planning to introduce a new wage code from April, under which wages for the purpose of calculation of gratuity and provident fund contributions will have to be at least 50 per cent of employees’ total pay.

So far, if the premium paid on Unit Linked Insurance Plans was less than 10% of the total insurance cover, the amount received at the time of maturity was exempt from tax. For all ULlP policies purchased after February 1, if the premium exceeds more than Rs 2.5 lakh a year, the maturity amount will be subjected to capital gains tax.

The limit of Rs 2.5 lakh would be applied across ULIPs held by the same policyholder. However, sums received upon death will continue to be exempt. To enjoy the tax-free benefits of ULIP, investors have to buy a policy where the annual premium is not more than 10% of the sum-assured. Though the term of ULIP is 10 years, one can get the pre-maturity tax-free amount after five years of the policy being enforced.