Budget 2021: Nirmala Sitharaman has announced a tax on PF contribution of more than 2.5 lakh rupees annually. Whereas, only last year the central government has passed the new wage code. In such a situation, there can be a double hit on salaried class.
new Delhi. This budget of Nirmala Sitharaman can prove to be a double whammy for the salaried class. On Monday, the Finance Minister announced a tax on provident fund contributions of more than Rs 2.50 lakh per annum. For most salaried classes, PF is considered the best option for saving after retirement. The new wage code will not only reduce take-home salaries but will also affect retirement savings.
Till now there was no cap on investment in provident funds for tax free returns. In the last year itself, the upper limit to invest maximum Rs 7.5 lakh in provident fund schemes has been fixed. Now, after investing 2.5 lakh rupees annually in Employees Provident Fund (EPF), tax has to be paid at the time of withdrawal.
PF contribution will increase when compensation amount decreases,
with this, the new definition of wages in the wage code 2019 shows that the contribution of employees in PF will be increased. This will reduce their take-home salary. According to this, the government has imposed a cap on 50% of the total compensation amount. This will increase the burden of expenses on the employers and will also reduce the take home salary of the employees.
To comply with the new rule, employers will have to increase the ratio of basic pay and as a result the contribution of employer and employee will increase.
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how will the savings be affected
For example, suppose that the basic monthly income of a person named Amit is Rs 1 lakh and his PF contribution is Rs 20,000. Suppose their PF contribution increases to Rs 25,000 with the introduction of new wage code, then their take home salary will be reduced by Rs 5,000 per month. Since his annual contribution to the PF will be more than Rs 2.5 lakh, according to Rs 25,000, in such a situation he will have to pay tax to Amit after the budget announcement. In this way, their savings will also be affected.
Let us know that the new wedge was passed in the month of August last year, which will also be applicable from 1 April 2021.
