Union Budget 2021-22 brought some good and bad news for employees in the country. The good news came in the form of no new surcharges or taxes. The finance minister maintained the slabs and proposed to further simplify direct tax administration.
Taxes for high-income earners
However, there is some bad news, especially for high-income employees who have traditionally leveraged voluntary provident fund contributions to earn tax-free interest income. Until now, there was no limit on the voluntary employee contributions to EPF schemes. The interest on the contributions, which is typically higher than other fixed deposit products, was tax-free in the hands of the employee. Over the many decades of the working life of an employee, compounding leads to a substantial corpus. The budget proposed to restrict tax exemption for the interest income earned on the employees' contribution to EPF, PPF and NPS schemes to an annual contribution of Rs 2.5 lakh.
This change is not likely to impact the vast majority of employees in the country. However, it significantly affects the high-income employees who leverage EPF as a key long-term savings instrument for their retirement. As an example, if an employee contributes Rs 50,000 a month voluntarily to the EPF, at an interest rate of 8.5 percent a year, she currently gets an interest income of Rs 51,000 in the year. However, in the proposed scenario, she will get tax free interest income only on Rs 20,833 a month. Assuming that the employee is in the 30 percent tax bracket, the remaining amount, i.e., Rs 29,167 will attract tax of Rs 8,925 in the year. In a scenario when the employee contributes Rs 100,000 per month to the EPF, their tax liability will stand at Rs 24,225 in the year.
The good news is that the ease of tax administration and compliance were reiterated many times. The finance minister reduced the time limit for income tax proceedings, announced dispute resolution committees and faceless ITAT. Pre-filled Income-Tax Return (ITR) forms with details on capital gains from listed securities, dividend income and interest income from banks and post offices will help high-income earners be at ease with their tax compliance.
Due to COVID-19, travel had come to a standstill. Employers gave cash allowance to the employees in lieu of LTC (Leave travel concession). The budget proposed to exempt this cash allowance if spent on purchasing goods or services whose GST rate is 12 percent or more. This amount has to be spent between October 12, 2020 and March 31, 2021. The benefit is limited to the current financial year only.
There is a lot of good news for workers at the lower end of the income spectrum. Many important announcements were made for employees in the unorganised sector, gig, platform and home-based workers. The budget proposes to extend social security benefits to such workers. It announced ESIC coverage for all categories of employees. The budget announced a provision to create a national registry for gig, migrant and construction workers. This registration will help them to avail the healthcare, skill development, insurance, credit and food schemes. In addition, it proposes to bring these employees under the minimum wages scheme. Details are awaited on the process of enrolment and contributions for ESIC and procedures for fixing minimum wage. All in all, the budget was great for the vast majority of India's employees with some unwelcome news for high salary earners.