B Negative: Two tax-free options go poof | Economic Times

NEW DELHI: Two widely preferred tax-free options for high-income earners have been made unattractive by the budget.First, interest earned by employees’ Provident Fund contributions above Rs 2.5 lakh a year will now be taxed at the prevailing income tax rates. Employers’ contribution is not part of this.Second, the tax exemption to ULIPs with a premium of more than Rs 2.5 lakh annually has been removed. Gains will now get taxed in the same rate as equity-oriented mutual funds. Long-term capital gains from equity-oriented funds (holding period one year) beyond Rs 1 lakh are taxed at 10%. Notably, the Rs 2.5 lakh ceiling will be calculated on aggregate premium in case an investor holds multiple ULIPs. This removes the option of investing in multiple policies to stay below the tax threshold.Importantly, the ULIP measure comes into effect immediately, unlike the one on PF interest tax, which will apply from April 1. The Rs 2.5 lakh annual threshold means that a person contributing up to Rs 20,833 a month to PF (basic salary of up to Rs 1.73 lakh a month) will escape the tax, provided he is not opting for Voluntary Provident Fund (VPF) contributions. VPF is the option where employee contribution to PF can be above the 12% of basic. For high-income earners opting for VPF, tax burden will be higher.The tax on PF interest comes after the last budget had capped the tax exemption on employers’ contribution to PF, NPS and superannuation fund to Rs 7.5 lakh. That impacted only employees with very high salaries. This year’s proposal has a wider impact.“This is a big change. It will hit highincome salaried people who use the Voluntary Provident Fund to earn taxfree interest,” said Amit Maheshwari, Partner and India Tax Leader, Ashok Maheshwary & Associates LLP.Finance ministry officials said the new measure will impact less than 1% of the total PF subscribers. This is not the first time that the government wanted to tax PF.