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New EPF Tax Rules and Alternative Investment Options to Voluntary Provident Fund (VPF)

During Budget 2021 Finance Minister announced interest earned on the EPF contributions (only employee contribution) above ₹2.5 lakh a year will be taxable from 1 April 2021.

If there is no employer contribution, the deposit threshold limit in provident funds has been raised to Rs 5 lakh per year, with interest remaining tax-free


The High Net worth salaried employees who use Voluntary Provident Fund to invest more than mandatory 12% of basic pay, will also be impacted as it will fall under their Tax Regime.

Under the existing tax provisions, interest received/accrued from employee’s provident fund (EPF) is exempt from tax. It is proposed that the interest earned on the EPF contributions (only employee contribution) above Rs 2.5 lakh a year will now be taxable. This could potentially impact employees in high-income bracket or employees making large voluntary employee provident fund contributions(VPF)



Any Alternative Investment Options to VPF Post This New PF Tax Rule ?


Yes .We Will discuss Three of the Alternative Investment Options



1-Debt Mutual Funds-Alternative Stable  Investment Option to VPF Contribution Above 2.5 Lacs Under Fixed Income as Asset Class


The SLR of investment stands for safety, liquidity and returns. EPF / VPF is safe. Debt MFs can also provide reasonable safety provided you select the Debt fund with the right portfolio quality and do the right matching of portfolio maturity and your investment horizon.


Wealthy PF Investors May Opt for Medium to Long Duration Debt Funds as Budget changes Tax Rule


Wealthy investors who park their spare money in voluntary provident fund (VPF) accounts may consider moving to debt mutual funds after the Union Budget’s new proposals.

In  Voluntary Provident Fund (VPF), employees contribute voluntarily, there is no tax benefit under section 80C of the Income tax Act (unlike contributions to EPF which qualify for tax benefits under Section 80C). But VPF earns the same attractive rate of interest as EPF and the interest has been tax exempt till now.


Headline salary would be approximately Rs 40-41 lakh per year. People earning higher than this can look for comparable options for their VPF contribution like Debt Mutual Funds as Mentioned Above.


Considering the actual  rate of interest in 2020-21 being 8.5%, Taking a tax rate of 30%, ignoring surcharge and taking cess at 4%, the net of tax return comes to 5.8% .


Liquidity is an issue in VPF. As against that, open ended mutual funds (MFs) offer liquidity in the form of easy redemptions and good credit quality as well, provided you select the right fund. There are Government Security based funds, there are funds based on State Government papers known as SDLs (State Development Loans) and funds with portfolios of AAA oriented PSUs and private sector companies. Debt MFs offer tax efficiency as well, over a holding period of 3 years or more. There is indexation benefit.


2-Alternative Investment Option to VPF Contribution Above 2.5 Lacs Under Equity as Asset Class


ELSS- Equity Linked Savings Scheme.ELSS is a category of Open Ended Equity Mutual Funds which has lock in of 3 yrs ,provides equity returns and tax benefits under 80C.Though it denotes Investment in riskier assets ie equity,but If one has risk apetite and uses disciplined process which Mutual Funds bring, ELSS is one of the best 80C investment which gives an investor Wealth Creation +Tax Benefits Under 80C . Need to Note Long Term Capital Gains applicable on Withdrawal ie LTCG 10% More than 1 Lac.   ELSS schemes from AMCs have delivered superb Long Term double digit Compounding Returns


3-Low Cost Pension Scheme as Alternative to VPF Contributions Above 2.5 Lacs for Creating Potential Retirement Corpus


NPS (National Pension System). This is a post-retirement income product that provides for a market-linked pension system. It allows the investor to choose an asset allocation between equity and debt,  matures at age 60, but has some restrictions on utilization of corpus on maturity. Only 60 percent of the NPS corpus can be withdrawn tax-free, while the remaining 40 percent must be used to buy an annuity (pension) product to provide taxable pension-income. If one is already investing in equity funds, then one can set conservative allocation for NPS (Schemes G and C ) and invest the amount above Rs 2.5 lakh in NPS instead of VPF.

Many employers offer NPS in addition to EPF.

By this one can divert the excess part of employee contribution to conservatively-allocated NPS. For those who have no other exposure to equity, equity in NPS allocation can be considered. Since equity in NPS is expected to deliver higher-than-debt kind of returns in the long run (as NPS returns are market-linked)


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