Budget 2021 Highlights

The Finance Minister presented the Union Budget 2021 on February 1, 2021. Here are the key highlights.

Tax Slabs Remain Unchanged

No changes have been made to the existing income tax slabs.

Interest on EPF Becomes Taxable

If you contribute more than Rs 2.5 lacs to your EPF account every year, the interest earned on the excess portion (over Rs 2.5 lacs) will be taxable.

Let’s say you contribute Rs 4 lacs to your EPF account in the FY2022. Interest earned on the first 2.5 lacs will be exempt from tax. Interest earned over the excess contribution (Rs 1.5 lacs) will be taxed at your slab rate.

A couple of conditions apply:

  • This applies only to the contributions after April 1, 2021. For the contributions made until March 31, 2021, the interest earned on your contribution to EPF remains tax-exempt.
  • This applies only to your contribution to EPF account. Rules pertaining to employer contribution to your EPF account have not been changed.

By the way, with EPF contribution, nothing is ever final. It is possible that the Government will take it back and make concessions. However, the Government has played this smartly. Not many will be affected because of this change. For you to be adversely affected right away, your monthly EPF contribution should not exceed about  Rs 21,000 per month. For you to make that contribution, your basic salary should be over Rs 1.75 lacs per month. Clearly, not many will be affected immediately.

However, this will clearly make VPF (Voluntary Provident Fund) less appealing.

Note that the proposed change is in addition to changes announced in the Union Budget 2020.  Last year, the employer contribution (cumulative) to NPS, EPF and superannuation funds in excess of Rs 7.5 lacs in a financial year was made taxable. Not just that, even the returns from that excess employer contribution were made taxable. The changes announced in Union Budget 2020 applied only to employer contribution to your EPF, NPS and superannuation accounts.

ULIP Taxation Brought on Par with Equity Mutual Funds

Budget 2018 made long term capital gains (LTCG) on sale of equity mutual funds taxable at 10%. The only relief was that Rs 1 lac of such LTCG was kept exempt from tax.

On the other hand, maturity proceeds from ULIP (Unit Linked Insurance Plans) were still exempt from tax. ULIPs can also invest in stocks. If you invested in equity mutual funds, you had to pay tax on capital gains. While ULIPs had their own share of drawbacks, they scored one over equity mutual funds because of the tax-free nature of maturity proceeds.

The Budget 2021 intends to remove this undue tax advantage given to ULIPs. If you pay more than Rs 2.5 lacs in annual premium (cumulative) for one or more ULIPs purchased on or after February 1, 2021, then the maturity proceeds will not be exempt from tax.

A few conditions apply:

  • Nothing changes for ULIPs purchased before February 1, 2021. The proposed changes shall be applicable for policies purchased on February 1, 2021.
  • If your cumulative annual premium for ULIPs purchased on or after Feb 1, 2021 does not exceed Rs 2.5 lacs, nothing changes for you.
  • The aforesaid proposal applies not just to maturity proceeds. It applies to partial withdrawals and surrender proceeds too.
  • The gains from such ULIP funds will be as treated capital gains and taxed accordingly.

What Is Not yet Clear?

ULIPs have both equity and debt funds. 

  1. If a ULIP is not exempt from tax, then sale of ULIP equity fund may result in short term capital gain (taxed at 15%) or long term capital gain (taxed at 10%). Tax relief for LTCG upto 1 lacs on sale of equity shall apply to ULIP equity funds too.
  2. If a ULIP is not exempt from tax, then sale of ULIP debt funds may result in short term capital gain (taxed at slab rate) or long term capital gain (20% after indexation).
  3. Note that even switches between various schemes of a ULIP will result in tax liability.

Will need clarity on the above 3 aspects.

Note that, the amount received on the death of the insured person (death benefit), continues to remain exempt, irrespective of the amount of ULIP premium paid.

Tax Benefit under Section 80EEA Extended

This section was introduced in last year’s budget. Under Section 80EEA, you could avail tax benefit of Rs 1.5 lacs for interest payment on a home loan provided:

  • The home loan is sanctioned between April 1, 2019 and March 31, 2021. The end date has now been extended to March 31, 2022.
  • The stamp duty value of the house must not exceed Rs 45 lacs.
  • You must not own any house on the date of sanction of housing loan.

Note this benefit under Section 80EEA is over and above the benefit of upto Rs 2 lacs for home loan interest payment under Section 24.

Additional Proposals

  1. Rs 35,000 crores allotted for Covid vaccination.
  2. Senior citizens above the age of 75 do not need to file income tax returns if their only source of income is pension and interest income.
  3. Customs duty on gold and silver revised downwards from 12.5% to 10%. Gold prices have dropped by the extent already.
  4. IPO of LIC in the offing. This is part of the Government’s disinvestment programme.
  5. Advance tax liability on dividend income arises only after declaration/payment of dividend.

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