How EPF Helps You Save On Tax?

EPF is a three-way tax saving instrument that can help you build your retirement corpus with a mandatory contribution from your employer. Confused? Well, read on to know it in details.

EPF stands for Employee Provident Fund and is a financial tool available to salaried individuals in India. The scheme is designed to offer retirement benefit to salaried individuals. If you are reading this, then you must be employed and EPF is surely a part of your package. Let me explain how EPF helps you to save tax.

Employee Provident Fund is a scheme that promotes savings in order to create a retirement corpus. This scheme is governed by the Employees’ Provident Fund Organization and is managed as per the rules and regulations of the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952. Under the EPF Act, 1952, the EPFO operates 3 different schemes namely:

• Employees’ provident fund scheme,
• Employees’ Pension Scheme and
• Employees’ Deposit Linked Insurance Scheme.

Thus, salaried individuals, like you are investing in the EPF scheme, as a compulsory portion of your salary and are entitled to provident fund, insurance benefit and pension benefit. This article will thus, help you understand the benefits of investing in Employee Provident Scheme.

Let me explain the host of features and benefits that EPF offers to you. Before I begin, you need to know that the EPF scheme is one of the best financial planning tools that your employer has provided you. How is that? Well, you will understand when I begin to tell you the key features and benefits offered by the EPF scheme.

1. One of the biggest benefits of investing in EPF scheme is that the interest earned on the investments in EPF account does not fall in the ambit of income tax i.e. the interest earned on the EPF investments is tax-free.

   So, basically the entire income from your EPF corpus is tax-free!

2. Not only interest, but also withdrawals from EPF are tax-free. So, any withdrawal done after completion of 5 years or at the time of maturity of the investment does not fall in the ambit of income tax.

3. The payment done towards creating your EPF corpus is also tax-free U/S 80C. So, any contributions made by you towards your EPF fund are tax deductible under Section 80C of the Income Tax Act, 1961.

   And this can be used at the time of your ITR filing as well!

4. Another major feature of the EPF scheme is that the same amount contributed by you towards your EPF scheme is also paid by your company. So, if you pay INR 100 towards your EPF scheme in a particular month, your company also pays an additional amount of INR 100 towards the same. Basically, you end up accumulating INR 200 in your EPF corpus! Isn’t that amazing?

5. Though EPF is a forced savings plan by the Government, it helps as a financial saving instrument which can be utilized in emergency situations like medical treatment, children marriage etc. In case of financial emergencies, you can even prematurely withdraw accumulated funds from your EPF account.

   It basically works like your Plan B!

6. Even if you plan to change jobs, you can either transfer your EPF account to your new employer or withdraw the accumulated corpus from the EPF account. However, you can do so but only after completion of 2 months post resignation.

7. In case of death of the employee, the accumulated corpus in the EPF account is paid to the employee’s nominee. This amount is paid after 2 months and after submitting relevant proofs mentioning the employee being legally dead.

8. Since the rate of interest of the EPF scheme is specified by the Government, it keeps changing on a quarterly basis and depends on the debt rate of interest of the country.

In some companies, EPF is not mandatory but voluntary. But, given a choice, you must opt for the same. This is because EPF is a good financial tool with loads of flexibilities that offers tax saving opportunity to the employees.

Some of the most prominent benefits of investing in EPF account:

• EPF is considered to be a long-term investment tool
• It ensures financial stability and offers financial support in the retirement phase
• It offers guaranteed returns on the investments. Once the rate is declared by the Government, interest as per the declared rate will surely accumulate in your a/c based on the EPF corpus
• Investment towards the scheme is done by BOTH you and employer. It thus helps you to accumulate huge financial corpus useful at the time of retirement
• EPF offers tax benefit as well

Thus, above are the key reasons for investing in EPF. Following are the tax benefits that employees enjoy on their EPF investments:

• Your contribution is eligible for tax deduction up to Rs. 1,50,000 under Section 80C of the Income Tax Act.
• The entire interest earned on the EPF contribution is tax-free
• The money withdrawn from EPF account does not fall in the ambit of income tax, provided the amount is withdrawn after completion of 5 years. For premature withdrawal of amount from EPF account, the employee has to bear a certain percentage of income tax.

So, overall EPF is a win-win from all aspects, especially because it has the unique EEE tax benefit, i.e. exempt at the time of investment U/S 80C, interest is exempt from income tax and the maturity amount is also COMPLETELY tax free. How many financial instruments are there in the country that offer all these tax benefits?

Thus, the Employee Provident Fund is a very important financial tool as it offers tax-free savings and helps in building a huge retirement corpus. This retirement corpus is built as per the contributions made in the EPF account, but a minimum of 12% of the basic salary is done by you which ensures substantial growth of money that will offer financial support to you and your family in the post-retirement phase.

Apart from building a retirement corpus, EPF also helps in saving income tax as all the interest earned on the investment, employer’s contribution and withdrawal of money after completing 5 years are completely tax-free.

Contributions made in the EPF account are entitled to EPF pensions too. An EPF contribution consists of two elements namely employees’ contribution and employers’ contribution. Basically, the employees’ contribution entirely is invested to the provident fund while 8.33% of 12% of employers’ contribution goes towards EPS, while the remaining amount is contributed back to the EPF account. Thus, in this manner, you are eligible to receive a pension from the amount contributed by the employer in the EPF account.

Note: The amount of the pension is dependent on two important factors namely:

1. The total number of years in service and
2. The last drawn average salary in the year prior to retirement. EPF also extends insurance benefit to employees of the organization where no group insurance scheme is offered. In this manner, employees can benefit from insuring themselves and their family members under the EDLI scheme offered under EPF.

Employee Provident Fund scheme is a tax-saving financial tool specifically offering post-retirement benefits with insurance benefits. There is practically no reason for not investing in EPF that I can think of. Can you?