Explained: Will you become richer or poorer? How Budget 2021 will have an impact on taxpayer's pocket
New Delhi | Jagran Business Desk: While an overview of the Union Budget 2021-22 gives an idea that income tax slabs have been left untouched, it is not the case entirely. While the income tax payout for most people will remain unaffected, it might be a reason to worry if the salary is above a certain limit.
The reason is if your PF contribution is above Rs 2.5 lakh annually, the interest earned on the additional amount will now be taxable.
Let’s understand this better with an example. Suppose, you have an annual salary of Rs 50 lakh. With the new wage code coming to effect from April, your basic salary is likely to be about half or Rs 25 lakh.
Your contribution to PF at 12 per cent of basic pay would be Rs 3 lakh. Earlier, the interest earned on all of it would be tax exempt. Now, tax will be payable on the amount above Rs 2.5 lakh, that is on Rs 50,000 in this case. At the current PF interest of 8.5 per cent, that means Rs 4,250 would become taxable.
How much tax you end up paying on this depends on what the tax rates and slabs are in the year in which you withdraw the money.
Now let’s take another example. Suppose your salary is Rs 1 crore and your basic pay is Rs 50 lakh. Your PF contribution (at 12%) would be Rs 6 lakh and tax would be payable on interest on Rs 3.5 lakh, that is on Rs 29,750.
Finance Minister Nirmala Sitharaman announced a similar change in the taxation of unit-linked insurance plans (ULIPs) under Section 10 (10D) of the Income Tax Act. ULIP can no more be used as a tax-saving instrument if your annual premium amount is over Rs 2.5 lakh.
As per the new changes, the entire premium, and not just the incremental amount, becomes taxable the moment it goes over and above the threshold limit. Moreover, your income from such a scheme would be treated as a capital gain and taxed accordingly.
Posted By: Abhinav Gupta