Should you narrow your VPF contribution as new PF tax guidelines turn into efficient at the moment?

Effective 1 April, if you’re contributing greater than Rs2.5 lakh in your Employee’s Provident Fund (EPF), the curiosity earned on the identical will probably be taxable beneath the newly notified guidelines of the Finance Act 2021. This has made some individuals surprise if they need to proceed contributing in the direction of a voluntary provident fund (VPF) which earns the identical curiosity as that of EPF and enjoys the identical tax therapy.

“We have gotten varied queries from our purchasers who’re asking if they need to proceed with the investments or not,” unhappy Prakash Hegde, a Bengaluru-based chartered accountant. Employees might want to inform their employers firstly of the monetary yr in regards to the VPF contributions or any change in the identical.

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In Budget 2021, the federal government proposed to tax the curiosity earned on staff’ contributions above ₹2.5 lakh. They have additional raised the statutory restrict to ₹5lakh in instances the place there is no such thing as a contribution by employers. This modification will profit authorities sector staff.

Most consultants are advising their purchasers to proceed investing in VPF as it’s presently providing an rate of interest of 8.5%, which is far larger than the rate of interest being provided by small financial savings schemes equivalent to public provident fund (PPF). PPF is providing an rate of interest of seven.1% which was revised downwards to six.4% for the quarter ended 30 June 2021. However, after an outcry the federal government determined to roll again the choice.

Even after being taxed at 30%, an individual will earn curiosity on the fee of 5.95%, which is greater than submit tax returns of conventional devices equivalent to financial institution FD. Suppose an individual is contributing Rs5 lakh in the direction of EPF and VPF mixed then the tax legal responsibility will probably be round Rs6,375 (30% of 8.5% of (5 lakh minus 2.5 lakh)) for the yr for the particular person within the highest tax bracket. Therefore, it’ll make sense to proceed investing in VPF for long-term debt investments.

“We are advising our purchasers to proceed investing in VPF as even the post-tax return will probably be higher than most different devices,” stated Hegde.

“For these within the larger tax bracket, VPF will stay a superb possibility throughout the debt class,” stated Melvin Joseph, Sebi-registered funding adviser and founder, Finvin Financial Planners.

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