Finance Minister Nirmala Sitharaman has announced in the Union Budget 2021-22 to levy income tax on interest earned on employee's contribution towards the Employee Provident Fund, or EPF, if the sum is above Rs 2.5 lakh a year starting 1 April 2021.
his has created confusion amongst people regarding whether they should continue contributing towards a voluntary provident fund (VPF) that earns the same interest as that of EPF and enjoys the same tax treatment. Earlier the contributions were taxable and the interest earned thereon was exempt from tax
Who can invest?
Voluntary Provident Fund is an extension of the Employees' Provident Fund (EPF).
Only those salaried employees who have an active EPF account and regularly contribute towards EPF can put money in VPF
It is being said that those who invest heavily in VPF need to change their strategy after this rule has been changed in the Budget.
To know-how much, we can invest in VPF without attracting tax on EPF interest, we need to reduce the mandatory contribution to EPF from Rs 2.5 lakhs.
Starting from April 1, 2021, interest earned on contributions made towards Employee Provident Fund (EPF) shall be taxable in the hands of the employee. Such interest is taxable provided the contributions are more than Rs 250,000 (Rs 500,000 where contributions are not made by Employer).
In addition to EPF, it is common for individuals to contribute voluntarily towards PF (VPF). The limits for taxation as stated above is determined after considering the aggregate of EPF and VPF contributions.
It may be noted that the individual can still avail tax deduction subject to a ceiling of Rs 150,000 under section 80C on PF contributions. Considering this fact and the rate of interest the government offers, individuals can continue to contribute towards VPF
As soon as total investment in EPF and VPF reaches Rs 2.5 lakh, go for PPF, where we will receive high interest than the post-tax return of EPF.
If we still want to invest more after exhausting the Rs 1.5 lakh PPF limit, then we can invest in VPF.
EPF comes with a guarantee so it is still the best-fixed investment option after PPF for high salary earners.
Even after being taxed at 30%, a person will earn interest at the rate of 5.95%, which is more than post-tax returns of traditional instruments such as bank FD.
Suppose a person is contributing Rs 5 lakh towards EPF and VPF combined then the tax liability will be around Rs 6,375 (30% of 8.5% of (5 lakh minus 2.5 lakh)) for the year for the person in the highest tax bracket. Therefore, it will make sense to continue investing in VPF for long-term debt investments.
"For those in the higher tax bracket, VPF will remain a good option within the debt category.
New PF tax rules: Should your VPF contribution be deducted?
Finance Minister Nirmala Sitharaman has announced in the Union Budget 2021-22 to levy income tax on interest earned on employee contributions to the Employees Provident Fund or EPF, if the amount is above Rs 2.5 lakh per annum from April 1, 2021.
There is confusion among the people as to whether he should continue to contribute to the Voluntary Provident Fund (VPF) which earns interest like EPF and enjoys the same tax treatment. Earlier, the contributions were taxable and were exempt from interest rate tax
Who can invest?
The Volunteer Provident Fund is an extension of the Employees Provident Fund (EPF).
Only salaried employees who have an active EPF account and regularly contribute to the EPF can deposit money in the VPF
Does your VPF investment strategy need to change?
That being said, after the rule change in the budget, those who invest more in VPF need to change their strategy.
To know how much, we can invest in VPF without attracting tax on EPF interest, we have to reduce the mandatory contribution of EPF from two and a half lakhs.
From 1 April 2021, the interest earned on the contribution of the Employees Provident Fund (EPF) will be taxable to the employee. Contributions exceeding Rs. 250,000 (where contributions are not paid by the employer) if such interest is taxable.
In addition to the EPF, it is common for individuals to voluntarily contribute to the PF (VPF). The tax threshold is determined as described above after considering the sum of EPF and VPF contributions. It may be noted that the individual can still avail of tax exemption subject to a ceiling of Rs 150,000 under Section 80 of the PF Contribution. Given this reality and the interest rates offered by the government, individuals can continue to contribute to the VPF.
With the total investment in EPF and VPF reaching two and a half lakhs, go to PPF, where we will get more interest than the post-EPF tax return.
If we still want to invest more than the Rs 1.5 lakh PPF limit, we can invest in VPF.
PDF comes with a guarantee so for high-paying earners, it is still the best-stable investment option after PPF.
Even after levying 30% duty, a person will earn interest at the rate of 5.95%, which is higher than the post-tax return of traditional liquid instruments like Bank FD. Suppose a person contributes Rs. 50 lakhs to the combination of EPF and VPF but the tax liability will be Rs. 3 (Rs. , Will continue to invest in VPF for long term debt investment.
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