While presenting the budget for the next financial year 2021-22, the Finance Minister has announced taxation on Provident Fund (PF) contribution over a limit. After this announcement, investors are thinking of a better alternative to PF. According to the decision of the Central Government, if the annual PF contribution amount is more than 2.5 lakh rupees, then the interest received on the amount above this limit will not be tax free. On this, the tax liability will be made according to the bank FD. Due to tax on interest on PF, some employees are looking for other options but those who are making a contribution of up to Rs 20,835 per month will not be affected by the new rule. However, you can think of other options if you have more than this.
According to Rajesh Bansal, MD of financial services firm Midar Finserve, the interest on the contribution amount of more than Rs 2.5 lakh per annum in the Employee Provident Fund (EPF) will be treated as taxable income and tax will be calculated according to the normal rates. According to Bansal, this will only apply to the contribution of the employee, not the contribution of the employee.
Many employees limit the legal limit prescribed for basic pay to their PF account by more than 12 per cent. According to the PF rules, the employee can contribute more than 12 per cent of the basic pay, but it is not necessary for the employer to exceed the limit.
5.5-5.85% return even after tax on PF
Other options in the debt asset class may be PPF (public provident fund), NSC, KVP, bank deposits or debt funds. PPF can invest up to a maximum of Rs 1.5 lakh and it gets an interest of 7.1 per cent but most workers meet this limit. At present, interest is getting around 6.5 per cent on bank deposits and this interest is taxable. In such a situation, the employees on whom PF Taxable Rule will apply, if they wish, they can continue to invest in PF. The biggest reason for this is that even after tax, they will get returns of 5.5 to 5.85 per cent, which come in the highest income tax slab.
Liquidity problem in VPF, FD better
Some employees choose to invest in VPF because it gives investors the option of the highest tax-free return. Apart from this, there is a sovereign guarantee on investment in it. The interest rate of PF has been kept at 8.5 per cent for FY 2019-20 and FY 2020-21. Contribution can be stopped by informing your employer in VPF, but the amount is locked until retirement. You get liquidity in other debt investments like bank FDs.
NPS is also a better option
Employees can consider market-linked investments if they want. Employees can consider investing in NPS in which equity fund option is given priority. 60% of the amount can be withdrawn on retirement in NPS, which will be taxfree. An annuity plan will inevitably have to be taken from the remaining amount, which will provide pension for life.
Can invest in market linked options
Banks may consider Employee market-linked options, which invest more than Rs 2.5 lakh per annum, mainly liquid and debt funds, in addition to debt investments such as FD, PPF. Santosh Joseph, founder and CEO of Germivet Investor Services LLP, says that investors in mutual funds have many options and they can choose the best option according to their own.
Investors can choose the best option according to their financial need and ability to take risk. Investors, apart from mutual funds with equity, hybrid and multi-cap funds, can also invest in funds that can invest in international markets and commodities. Apart from this, there are dynamic equity funds and balanced advantage funds that can give investors better returns at a lower risk.
(Article: Sunil Dhawan)