Tax Talk: Investing in EPF & Ulips? Take note of I-T changes

By Shailesh Kumar

The Employees Provident Fund (EPF) scheme has been one of the preferred investment options for the salaried taxpayer. In FY20, EPF had offered an interest rate of 8.50%, which is much higher than that offered by commercial banks on term deposits. Again, interest income from investment in EPF was also exempt from income tax, without any monetary limit. Thus, EPF was an attractive investment option, especially for employees in higher salary brackets who would make additional voluntary investment in EPF over and above 12% of salary as required under EPF regulations.

Another popular investment instrument for middle-class taxpayers has been unit-linked insurance plans (Ulips). Like EPF, income/ bonus arising from Ulips to the investors has been exempt from income tax without any monetary limit, which made Ulips an attractive investment option. Additionally, Ulips offered an option of availing tax-free returns linked to the securities market, which made it all the more attractive post withdrawal of income tax exemption to long-term capital gains from sale of listed securities.

However, in Budget 2021 the government has proposed to impose a monetary limit on income tax exemption allowed in respect of investments made by individual taxpayers in EPF or Ulips.

Tax on EPF
The government has proposed that if an individual’s investment in his EPF account exceeds Rs 2.5 lakh in any financial year starting on/ after April 1, 2021, interest earned on such investment in excess of Rs 2.5 lakh would not be eligible for income tax exemption. This move will not only impact employees making voluntary EPF contribution over and above mandatory contribution of 12% of basic salary, but also those high salaried employees, whose annual contribution in EPF exceeds Rs 2.5 lakh even if their contribution is limited to 12% of basic salary. It may be noted that income tax exemption will continue in respect of contributions made till March 31, 2021, even if annual contribution in these earlier years exceeded the newly introduced monetary limit of Rs 2.5 lakh.

Tax on Ulips
Similarly, for Ulips, the government has proposed that income tax exemption allowed under Section 10(10D) will be available only to those policies issued on/ after February 1, 2021, where annual premium or aggregate of annual premium does not exceed Rs 2.5 lakh. It may be noted that income tax exemption will continue in respect of Ulips issued till January 31, 2021, even if annual premium in earlier years or even in future years exceeds the newly introduced monetary limit of Rs 2.5 lakh in future years.

Taxpayers must keep in mind these new proposed changes in income tax law, while planning their future investments.

The writer is partner, Nangia & Co LLP