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The latest budget was expected to provide a much-needed boost to the slowing economy and investor confidence. While the effect on the broad economy will be visible in some time, the road is pretty clear for the individual investor. While there have not been visible changes in tax-slabs and tax-rates, changes have been made to reduce the tax-exempt incomes.
Changes to Tax-Exempt Status of Provident Fund
Up till now, you could contribute additional money to your recognised provident fund accounts and hope to build a larger corpus for your retirement. But with new conditions introduced in the budget, you can invest a limited amount if you want to keep your retirement funds tax-exempt.
Union Budget 2021 proposes to put a cap of Rs.2.5 lakhs on the annual investments into your provident fund. If you happen to contribute more than 2.5 lakhs in any financial year the interest on the additional amount will become taxable.
This will apply to even those investors whose annual contribution is more than Rs. 2.5 lakhs due to their income. So, if your annual income is high enough, you may look forward to using other means of saving for your retirement.
Changes to Unit Linked Insurance Plan Investments
ULIPs have been popular and versatile investment options whether you are looking for building your retirement corpus or pension. The tax-exempt status of maturity value and partial withdrawals has been add-on benefits of ULIP investment.
With Budget 2021, the tax-exempt investment to ULIPs has also been capped to Rs. 2.5 lakhs per year. So, if you invest more than Rs. 2.5 lakhs in ULIP plans in a year, the interest earned on the additional investment will become taxable.
New Retirement Portfolio
In the light of new developments, you have to make a couple of changes to your ongoing and future portfolios.
1. If you are already investing more than Rs. 2.5 lakhs in ULIPs, you need not worry about the exemption limit. The limit will, however, apply to any new ULIP investment you start after February 1, 2021.
2. Since the contribution to PF has been capped at Rs. 2.5 lakhs a year, you can add more investment options to your retirement portfolio. Few of the best options are:
Diversifying your investments to various investments, especially ULIPs and NPS accounts adds better growth chances to your retirement funds.
Additional Announcements for Individual Tax-Payers
Additionally, the Budget 2021 also exempts certain individuals from the liability of filing income tax returns. The Budget proposes to exempt individual taxpayers aged 75 years or above from filing ITR if there income includes only the following:
Thus, Union Budget 2021 does provide some relief to individual tax-payer.
Salaried class has two major categories of expenses – household and taxes. However, various investment options do allow for a reduction in the annual tax-liabilities. Such investments include retirement plans, life insurance plans, and other long-term tax-saving options.
With the latest announcements from Union Budget 2021, few things which have come-up for salaried taxpayers are:
The changes in tax structure announced in the Budget 2021 for salaried investors may be minor but have a long-term impact.
Tax Slab Options
Before we get to the exact changes, remember that you have the option of using old and new tax slab rates now. Depending on whether you want to claim deductions or file your ITR without them, you can choose any of the following tax rates:
|Income||Tax Rate (Old Regime)||Tax Rate (New Regime)|
|0 to 2.5 lakhs||Nil||Nil|
|2.5 to 5 lakhs||5%||5%|
|5 to 7.5 lakhs||20%||10%|
|7.5 to 10 lakhs||20%||15%|
|10 to 12.5 lakhs||30%||20%|
|12.5 to 15 lakhs||30%||25%|
|More than 15 lakhs||30%||30%|
Where basic exemption limit had been different based on the age of the taxpayer, the New Regime offers uniform tax-slabs for all taxpayers regardless of the age.
If you estimate your tax based on the rates under the new regime, your liability will be lower. However, you cannot claim any deductions from gross total income under section 80 of the income tax act. Thus, post deduction the tax rates have an almost similar impact on your tax liability.
The deduction for affordable housing available to individual homebuyers under section 80EE has been extended and enhanced with section 80EEA. The new limit allows a deduction of interest paid of up to Rs 1.5 lakhs on home loan taken to purchase the first house.
The only conditions are that it should be your first house and the total value of the house should be less than Rs. 45 lakhs. Additional conditions are that you should have taken the loan between 1st April 2019 and 31st March 2020.
Thus, if you have taken the loan earlier and you are eligible for deduction under section 80EE, you may not claim additional deduction under section 80EEA.
Combined with Section 24, this section can allow you a total deduction of Rs. 3.5 lakhs a year on the home loan interest.
Investing for Retirement
As a salaried individual, if you are investing in employee provident fund (EPF) or similar recognised PF accounts, you should get ready to diversify. Union Budget 2021 has announced an additional condition for the tax-exempt status of your PF contributions.
Earlier the only criteria for tax on the maturity value of PF were the ratio in which you can withdraw in lump-sum. Starting 1st April 2021, if you contribute more than Rs. 2.5 lakhs in a financial year to your PF, the interest on additional contribution will be taxable.
Thus, if you have high enough salary that your 10% contribution to the EPF account exceeds Rs. 2.5 lakhs a year, you should either
You can still use the following instruments to improve your retirement savings without paying additional taxes:
Another area of your investment life affected by the latest Union Budget is the wealth-building goal. The best way of building wealth for salaried investors is to automate your investments and portfolio management. Unit Linked Insurance Plans (ULIPs) have been the most popular investment option capable of doing all this and with a tax-exempt maturity value.
Tax-exemption played a major role in this direction. Thus, (ULIPs) from life insurers have been the most popular wealth-building investments for salaried investors.
The Union Budget 2021, however, caps your ability to invest more in the ULIPs. The new cap is Rs. 2.5 lakhs a year. If you happen to invest more than this amount in ULIPs you bought after 1st Feb 2021, you are liable to pay tax on any interest accrued on the excess amount.
For example, if you have two ULIP with an annual premium of Rs. 2.5 lakhs and Rs. 1.5 lakhs respectively. The ULIP with a premium of Rs. 2.5 lakhs will have completely exempt maturity value. But the other ULIP will have a taxable maturity value.
However, if you start investing in a single ULIP with a premium of Rs. 3 lakhs. The gains on maturity value will be prorated and any gain on the additional investment of Rs. 50,000 per annum will be taxable.
Thus, now you need to diversify your wealth-building investments as well as retirement savings.