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    Common Tax Problems for 2021

    Last Updated On 18-06-2021

    The last year has been a rollercoaster with many changes happening around the world. Whether it was the lockdown or the virus wreaking havoc in the lives of millions of people, there were quite a few problems to deal with on multiple fronts. To add to this, some tax changes made in the last one year (2020-21) brought in some challenges for people too.

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    This article talks about some common tax problems that you might have encountered in the recent past or are likely to encounter in the coming year due to a change in tax policies. Read on to know more:

    1. The taxability of ULIPs: The Unit-Linked Investment Plan (ULIP) has been a great tax saver plan for investors of different income groups for years. This financial tool offers people life insurance and tax-free investment under a single policy, thereby appealing to many. However, as per Budget 2021, ULIPs will now be taxed differently.

    As per the old rule, the proceeds from a ULIP were tax-free under Section 10(10D) of the Income Tax Act, 1961 if the annual premium for the policy was below 10% of the sum assured of the plan.

    However, as per the new rule, the profits from a ULIP will now be considered as capital gains at taxed at 10% at the time of maturity if the premium paid for any year crosses the limit of ₹2.5 lakhs. This change will impact all policies issued after February 1, 2021. However, the ones bought before this date will continue to operate as usual. The tax-free proceeds of the ULIP give it an edge over mutual funds.

    This was one of the main reasons why most people invested in the insurance plan. However, the introduction of this new law and the capital gains tax on savings is likely to create some disappointments.

    2. The LTC cash voucher: Leave travel concession is a special benefit that is extended to government and private employees to cover the costs of travel to their home town two times in a span of four years. LTC is tax-exempt up to the authorized air or rail fare limit. As per the old rule, the maximum available amount for each family member was ₹36,000 for business air travel, ₹20,000 for economy air travel, and ₹6000 for rail travel./p>

    However, since the pandemic put restrictions to travel, the government introduced the LTC cash voucher instead. As per this, employees can claim a cash payment in place of LTC between the years 2018 and 2021. This implies that you can buy goods and services amounting to the value that is three times the fare authorized to you under LTC and one time the full leave encashment amount before March 31, 2021. You can only use digital transactions under the scheme, and cash transactions do not qualify for the scheme.

    In addition to this, you also need a GST invoice for every purchase. While the LTC cash voucher is a great scheme, it has its pros and cons for different people. For instance, if you had a big purchase planned for the year, spending up to three times the fare can help you save a lot. However, spending such a high amount just to save some tax may not be the best idea, especially if your tax output is not as high in the first place. In this case, the LTC cash voucher is not a great tax saver plan.

    3. Rise in custom duties: The COVID 19 pandemic impacted the small sector industries in many adverse ways. This further affected the economy and the livelihood of thousands of Indians. In an attempt to boost and promote domestic manufacturing and the Ministry of Micro, Small & Medium Enterprises (MSME) sector, the Budget 2021 increased the custom duties of some products. Prices of items like mobile phones and chargers, boring machines, cotton, leather, silk, as well as alcohol may see a hike and upset taxpayers but are expected to lift the economy.

    4. The taxability of EPF: Up until March 2020, contributions amounting to 12% of the basic salary and dearness allowance made by the employer and the employee were tax-free for the Employee Provident Fund (EPF). When the Budget 2021 was announced, a new rule was introduced accordingly to which EPF contributions above ₹2.5 lakhs in a year were taxable from April 1, 2021.

    This was a considerable blow to taxpayers, as EPF is considered as the best tax saving plan by several taxpayers. Thankfully, a new clarification was later issued that increased the taxable limit from ₹2.5 lakhs to ₹5 lakhs in a year. It is important to note that this change was only applicable for an employee who did not get an employer contribution. Nevertheless, the increased limit can lead to some remarkable tax savings.

    5. Other changes: Some other changes taxpayers are going to witness this year include the option to pre-fill capital gains on the income tax returns form, an exemption to file ITR for citizens over the age of 75 who earn income from pension and bank interest, the option to pay advance tax on dividends, and the addition of section 89A for simplified taxation for non-residents.

    To sum it up

    Taxpayers have a lot to look forward to in the coming months. With these amendments in tax laws, it may be challenging to keep track of all the new changes. Some confusion is inevitable, but it is important to understand that the government’s primary focus has been the pandemic and how to help taxpayers navigate around it.

    Furthermore, the since the last year has been so economically volatile, one of the best ways to maximize your earnings is to invest and save in tax saving plans that offer safe and assured returns. For example, products like life insurance, fixed deposits, unit-linked insurance plans, public provident funds, etc. can give good returns and remain secure options even during a period of high volatility.

    To know more about term plan, term insurance, long term savings & retirement plan visit PNB MetLife website.

     

    Disclaimer:

    The above note prepared based on our understanding of Income tax laws at broad level. Clients are advised to consult their tax consultant before taking any tax position.

    Tax benefits under sec 80(c) & 80(d). Tax benefits are as per the Income Tax Act, 1961, & are subject to amendments made thereto from time to time. Please consult your tax consultant for more details. Cash payment is not eligible for tax benefit under Sec 80D of Income Tax Act, 1961.

    The aforesaid article presents the view of an independent writer who is an expert on financial and insurance matters. PNB MetLife India Insurance Co. Ltd. doesn’t influence or support views of the writer of the article in any way. The article is informative in nature and PNB MetLife and/ or the writer of the article shall not be responsible for any direct/ indirect loss or liability or medical complications incurred by the reader for taking any decisions based on the contents and information given in article. Please consult your financial advisor/ insurance advisor/ health advisor before making any decision.

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