Effective 1 April, if you’re contributing greater than ₹2.5 lakh in your Employees’ Provident Fund (EPF), the curiosity earned on the identical will likely be taxable as per the newly notified guidelines beneath the Finance Act 2021.
This has made some individuals marvel if they need to proceed contributing in the direction of a voluntary provident fund (VPF) which earns the identical curiosity as that of EPF and enjoys the identical tax therapy.
“We have gotten varied queries from our purchasers who’re asking if they need to proceed with the investments or not,” mentioned Prakash Hegde, a Bengaluru-based chartered accountant.
Employees might want to inform their employers at the start of the monetary yr in regards to the VPF contributions or any change in the identical.
BUDGET PROPOSALIn Budget 2021, the federal government proposed to tax the curiosity earned on worker’s contribution above ₹2.5 lakh. The authorities has additional raised the statutory restrict to ₹5 lakh in these circumstances the place there is no such thing as a contribution by employers. This modification will profit authorities sector workers.
Most of the consultants are advising their purchasers to proceed investing in VPF as it’s at present providing an rate of interest of 8.5%, which is way increased than the rate of interest being supplied by small financial savings schemes resembling public provident fund (PPF).
PPF is providing an rate of interest of seven.1%, which was revised downwards to six.4% for the quarter ended 30 June 2021. However, after an outcry, the federal government determined to roll again the choice.
BETTER RETURNSEven after being taxed at 30%, an individual will earn curiosity on the charge of 5.95%, which is greater than the post-tax return of conventional devices resembling a financial institution mounted deposit.
Suppose an individual is contributing ₹5 lakh in the direction of EPF and VPF mixed, then the tax legal responsibility will likely be round ₹6,375 (30% of 8.5% of ₹5 lakh minus ₹2.5 lakh) for the yr for the individual within the highest tax bracket. Therefore, it should make sense to proceed investing in VPF for long-term debt investments.
“We are advising our purchasers to proceed investing in VPF as even the post-tax return will likely be higher than many of the different devices,” mentioned Hegde.
Melvin Joseph, Sebi-registered funding adviser and founder, Finvin Financial Planners, added: “For these within the increased tax bracket, VPF will stay a great choice throughout the debt class.”
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