Employees’ Provident Fund: The unintentional tax-saving investment for salaried employees – know tax benefits, returns of EPF – Times of India

Employees’ Provident Fund: The unintentional tax-saving investment for salaried employees - know tax benefits, returns of EPF - Times of India

Employees Provident Fund Tax benefits: This is the time of the year when you have to choose between the old and the new. Income tax Rule so that your employer starts deducting TDS from April salary. Understand the tax exemptions available under Old tax system And while deciding on tax-saving investments, don’t forget to consider yourself. EPF Partnership
Starting from 1st April 2023. New tax system became the default option. Consequently, if an employee fails to inform his employer of his tax regime preferences at the beginning of the financial year, the tax deducted at source (TDS) of his salary will be calculated on the basis of the new tax regime.
However, amidst the hustle and bustle, there is an often overlooked avenue that inadvertently helps in tax savings – the Employees Provident Fund (EPF). If you want to opt for the old income tax system, be aware of EPF benefits, returns, liquidity and other details.
Read this also New vs Old Tax System: How can even Rs 10 lakh income be tax free under the old tax system?
An individual’s contribution to EPF is deducted from their salary before reaching their bank account. This contribution is eligible for deduction under Section 80c Income Tax Act, 1961.

Maximizing EPF Contribution for Tax Benefits

According to an ET report, under the EPF scheme, employees contribute 12% of their basic salary to the EPF account, which is matched by the employer. However, the tax benefits under section 80C are applicable only to the employee’s contribution, not the employer’s.
It is important to highlight that there is no limit on the amount that employees can deposit in their EPF account, only a one percent limit. However, Section 80C allows a deduction of up to Rs 1.5 lakh per annum from the gross total income.
For example, if someone earns an annual basic salary of Rs 7 lakh, his EPF contribution for the entire financial year will be Rs 84,000 (12% of Rs 7 lakh). In this case, the entire amount is eligible for deduction under section 80C. To improve benefits under Section 80C, they can consider making additional investments in certain avenues like ELSS mutual funds or paying life insurance premiums.
Now, if someone earns an annual basic salary of Rs 15 lakh, his EPF contribution for the entire financial year will be Rs 1.8 lakh (12% of Rs 15 lakh). However, only up to Rs 1.5 lakh is eligible for deduction under section 80C. The remaining Rs 30,000 will not be eligible for deduction. So, while planning for tax saving investments under the old regime, it is important to note that the section 80C limit would have been utilized only by EPF.

Voluntary Provident Fund (VPF) for Better Savings

It is important to mention that individuals can contribute more than the mandatory 12% to their EPF account through Voluntary Provident Fund (VPF). They can contribute 100% of their basic salary to EPF. If an individual’s contribution to EPF is less than Rs 1.5 lakh in a financial year, he can make additional contribution through VPF. These VPF contributions are also eligible for deductions under section 80C.
Read this also TDS on Salary: Don’t Pay Too Much Tax! How to choose between new and old income tax system

EPF Returns, Liquidity, and Taxation

  1. EPF account holders are paid interest on their contributions. The government announces the interest rate every financial year and for the financial year 2023-24 it has been fixed at 8.25%. This rate is notified by the Ministry of Finance before the Employees Provident Fund Organization.EPFO) starts depositing money in the EPF account.
  2. Like other tax-saving investments, EPF also has a lock-in period. The EPF account matures at the time of the employee’s retirement, usually at the age of 58. However, if an employee quits his job and remains unemployed for two months thereafter, he can close the EPF account and withdraw the accumulated amount with interest. .
  3. Additionally, the EPF scheme allows partial withdrawals for certain purposes, subject to certain eligibility criteria. For example, withdrawals are allowed for buying a house after 5 years of membership, and for marriages of self, children and siblings after 7 years of membership.
  4. Investments in EPF account are tax exempt subject to certain conditions. As per Income Tax rules, an individual’s EPF contribution is tax exempt, provided it is withdrawn after 5 years of continuous service. However, withdrawals before completing five years of service are taxable.

Interest earned on an employee’s EPF contribution is exempt from tax to a certain extent. If the interest earned on the employee’s EPF contribution exceeds Rs 2.5 lakh in a financial year, it becomes taxable. However, if the individual’s EPF contribution remains below Rs 2.5 lakh in a financial year, the interest earned is exempt from tax. This limit has been increased to Rs 5 lakh for government employees.
Moreover, apart from the employee contribution, the EPF account also has an employer contribution. If the employer’s total contribution to EPF, Superannuation Fund, and National Pension System (NPS) exceeds Rs 7.5 lakh in a financial year, the employer’s contribution becomes taxable. Additionally, any interest, returns, or profits earned on the additional contribution will also be taxable.

Tax saving investment,Section 80c,Old tax system,New tax system,Income tax,EPFO,EPF,Employees Provident Fund
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