Money Bites – 12 Feb 2021
Short bites to keep you informed of all matters that impact your wallet and wealth.
Thanks for all the love and encouragement shown to our 1st edition of Money Bites sent out last week. Missed reading it? You can access it here.
The RBI kept its benchmark rates unchanged which means your loan rates and deposit rates remain the same. On the vaccine front, we have good news as India has turned out to be the fastest country to reach 70 lakh vaccinations.
Top bite this week
Will taxation on EPF interest eat into your retirement fund?
What’s going on here?
As a part of the Union Budget, the FM proposed taxation of interest earned on EPF & VPF when the contribution exceeds Rs 2.5lakh in a year.
What does this mean?
EPF is a retirement fund that is built through the working years of an employee in the organised sector. Your employer contributes 12% of your Basic+DA to the fund and a similar contribution is deducted from your end. 3.67% of the employer contribution and all of your contribution earns an interest decided by the EPFO. This is generally in the range of 8-10%.
EPFO is one of those contributions which falls under the EEE bracket which means that the contribution, interest earned and the maturity proceeds are tax-free. With the introduction of the new proposal, the interest earned on any contribution in excess of Rs 2.5 lakh per year, will be taxed. Contributions over Rs 2.5 lakh will be kept in a separate basket and taxed like interest on FDs. Tax will be deducted at the source at the rate of 10%.
Why is it being done?
Many individuals earning higher incomes end up contributing higher sum towards EPF. And there are certain individuals who contribute huge sums to Voluntary Provident Fund(VPF) which earns the same interest as EPF. VPF also comes under the EEE regime. This rule is being proposed as a deterrent to individuals contributing huge sums and earning tax-free interest income from EPF & VPF.
How will it affect you and me?
It is evident that the effective rate of interest for all those contributing beyond the limit of Rs 2.5 lakh will come down depending upon your tax slab. Calculations show that if your annual basic salary is close to Rs 21 lakh, then you would come into the EPF tax net. However, the Govt has argued that only less than one percent of the subscribers would be affected by this move.
It would be good to take a relook at your contribution to EPF and only if you are contributing more than Rs 2.5 lakh, you could take a call on moving your retirement contributions to other avenues like NPS or PPF.
You Ask – We Answer
Mutual funds or real estate – which is better for returns? – Ipsit Mishra, Bangalore
Mutual funds and real estate are different asset classes that can generate good returns when invested for longer tenures. Within the mutual fund universe, equity mutual funds, in particular, are able to generate good returns over longer terms. Incidentally, the performance of both these asset classes is tied to the performance of the economy of the country.
However, while returns on a mutual fund are uniform across the country, earning comparable returns from a real estate investment may require you to be able to cherry-pick regions/cities/towns that are poised to grow. Moreover, there are other factors like transparency, legal issues, encroachment, liquidity, the requirement of credit, etc which play a big part in any real estate investment. On the other hand, investments in mutual funds are easier to understand and invest in. In addition, they are regulated by SEBI so they are safe to invest in. You could also sell mutual funds anytime you are in need.
Even though you may be able to generate returns on real estate, the balance tilts in favor of mutual funds for all the other benefits
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Until next week,
Akshatha & Team Finity.