The Employees’ Provident Fund (EPF) is a popular retirement savings scheme in India that is regulated by the Employees’ Provident Fund Organisation (EPFO). Under this scheme, a portion of an employee’s salary is deducted each month and contributed to a fund, which earns interest and can be withdrawn upon retirement.
Apart from providing a valuable source of retirement income, EPF also offers significant tax benefits to its subscribers. In this article, we will explore how EPF helps you save on tax in India.
EPF contribution and tax benefits
As per current regulations, both the employer and the employee contribute 12% of the employee’s basic salary and dearness allowance (DA) to the EPF account each month. The entire contribution made by the employee can be claimed as a deduction under Section 80C of the Income Tax Act, up to a limit of ₹1.5 lakh per annum.
For example, if your basic salary is ₹50,000 per month and your EPF contribution is ₹6,000 (12% of basic salary), then you can claim a deduction of ₹72,000 (12 x ₹6,000) per annum under Section 80C. This will reduce your taxable income and subsequently lower your tax liability.
Employer contributions to EPF are exempt from tax
The employer’s contribution to the EPF account is also tax-exempt. However, the employer’s contribution is restricted to 12% of the employee’s basic salary and DA. Any contribution made above this limit is taxable in the employee’s hands as perquisites.
EPF interest and tax
The interest earned on EPF contributions is also tax-exempt. The interest rate on EPF is set by the EPFO every year and is currently at 8.5% for the financial year 2020-21.
EPF withdrawals and tax
Withdrawals from the EPF account after completing five years of continuous service are tax-free. However, if the withdrawal is made before completion of five years of service, it will be taxable in the year of withdrawal.
Partial withdrawals from the EPF account are also subject to tax. For example, if you withdraw from the EPF account for a specific purpose like home loan repayment, marriage, or medical expense, the amount withdrawn will not be taxed.
EPF Passbook and its significance
The EPF Passbook is an essential document that every EPF account holder must maintain. It is a record of all the contributions made by the employee and employer, along with the interest earned and withdrawals made from the account.
The EPF Passbook helps the account holder to keep track of the contributions made and the interest earned on their EPF account. This document is also essential while filing income tax returns as it provides proof of the EPF contributions made by the employee, which can be claimed as a deduction under Section 80C.
Conclusion
EPF is an attractive retirement savings option that provides significant tax benefits to its subscribers. By contributing to your EPF account, you can reduce your taxable income and subsequently lower your tax liability. The EPF Passbook is an essential document that helps track your EPF contributions and is necessary while filing income tax returns.
It is essential to keep in mind that EPF is a long-term investment, and premature withdrawals from the account can impact your retirement savings. Investors must gauge all the pros and cons of trading in the Indian financial market before making any investment decisions.
Summary:
EPF is a popular retirement savings scheme in India that offers significant tax benefits to its subscribers. By contributing to the EPF account, an employee can claim a deduction under Section 80C of up to ₹1.5 lakh per annum. The employer’s contribution to the EPF account is also tax-exempt. The interest earned on EPF contributions is tax-exempt, and withdrawals from the EPF account after completing five years of continuous service are also tax-free. The EPF Passbook is an essential document that helps track the contributions made and is necessary for filing income tax returns. However, premature withdrawals from the EPF account can impact retirement savings, and investors must gauge all the pros and cons of trading in the Indian financial market before making any investment decisions.
