The most important aspect of the 2021 budget is that there is no tax increase. The main changes proposed concern the taxation of ULIP and PF. ULIP is an investment option that also provides life insurance protection. The premium you pay for ULIP goes partly into insurance coverage and partly into investments.
Before this budget, the maturity proceeds from ULIP systems were tax-free in accordance with Section 10 (10) D EStG. In the 2021 budget, the exception from Section 10 (10 D) for ULIPs has been deleted. This means that if ULIP is issued after Feb. 1, 21 and the total annual premium is more than Rs 2.5 lakh, the amount due would be taxed at a rate of 10% if its long-term profit (if the profit is more than Rs 1 lakh is). and at a rate of 15% if it is a short-term gain. These changes do not apply to ULIPs that have already been purchased (before February 1st, 21st). This means that the proceeds from the maturity remain tax-free.
Another important change concerns the taxation of interest on EPF. If the employee’s contribution to the EPF this year is more than Rs 2.5 lakh, the interest would be taxable as would the tax on fixed-term deposits at a bank. These provisions apply from April 1, 2021. The premium paid for ULIPs or contributions to EPF is tax deductible in accordance with 80C of the Income Tax Act. Due to the maturity tax for ULIPs and the interest tax from EPF, the after-tax returns of these two investments are reduced.
According to Section 80C, one can make a maximum tax-saving investment of 1.50 lakh. Most of this range is filled by certain tax-saving measures such as school fees, EMI (principle) for home loans, etc. Therefore, one should determine how much tax he has already saved from this bracket of 1.50 rupees. Now there are two reasons why there are two reasons to think about going for NPS over EPF. First, the returns in NPS are tied to the market, so there is a long-term possibility of good wealth creation. Second, the flat-rate withdrawal (60% of the corpus) was made 100% tax-free compared to the previous year.
In terms of ULIPs, one can opt for risk insurance to buy life insurance and ELSS to invest in growth. With these changes in the 2021 budget, taxpayers should be making informed and wise tax planning.
(From Sujit Bangar, Founder, Taxbuddy.com)
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