Budget 2021 has not changed our income-tax rates and slabs. But Finance Minister has taxed those excess contributions in EPF & VPF.
The interest earned on your EPF contribution of over Rs 2.5 lakh in a financial year will now be taxed. This additional contribution will be taxed at existing slabs..
EPF is a very popular investment because it’s Interest rates are backed by the government. Currently 8.5% rate for financial year 2019-20 ..These returns are better than debt instruments.
Currently, your contributions, interest income as well as withdrawal proceeds have all been exempt (EEE) from tax. Budget 2021 has changed this taxation status.
Last year, they had limited the Employer’s contribution of EPF at Rs 7.5 lakh a year which is Tax Free in hands.
Employers are required to mandatorily deduct 12 percent of employees’ basic pay and dearness allowance as Employee PF contribution and deposit it in EPF. They also have to make equal contribution.
But the interest earned now has become taxable and will be added to your income slabs every year..
However, an individual contributing more than 12 percent of his basic salary through Voluntary PF will have to rework on his retirement planning for tax free income.
For FY 2019-20, EPFO has declared an interest rate of 8.5 %. Even an individual fall in the highest tax bracket of 30 percent, the effective interest will work out to 5.8%.
Also the high EPF interest of 8.5% is not guaranteed now. It is being reviewed every financial year and could go down further in the coming years. Hence, one could consider shifting the excess contribution to LIC Retirement Plans, as they offer around 8% Guaranteed Tax free income.
Also LIC investments are backed by Sovereign Guarantee by Govt.