Ranging from April 1, 2023, the new tax regime turned the default possibility. Consequently, if an worker fails to tell their employer about their tax regime choice at first of the monetary yr, their wage’s Tax Deducted at Supply (TDS) will likely be calculated based mostly on the brand new tax regime.
Nonetheless, amidst this hustle, there’s one often-overlooked avenue that inadvertently aids in tax-saving – the Workers’ Provident Fund (EPF). If you’re seeking to go for the previous earnings tax regime, then concentrate on the EPF advantages, returns, liquidity and different particulars.
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A person’s contribution to the EPF is deducted from their wage earlier than it reaches their checking account. This contribution qualifies for a deduction beneath Part 80C of the Revenue Tax Act, 1961.
Maximising EPF contributions for tax advantages
Based on an ET report, beneath the EPF scheme, workers contribute 12% of their fundamental wage to the EPF account, matched by the employer. Nonetheless, tax advantages beneath Part 80C apply solely to the worker’s contribution, not the employer’s.
It is essential to focus on that there is no cap on the quantity workers can deposit into their EPF account, solely a share restrict. Nonetheless, Part 80C permits deductions of as much as Rs 1.5 lakh yearly from the gross complete earnings.
For instance, if somebody earns a yearly fundamental wage of Rs 7 lakh, their EPF contribution for the complete monetary yr could be Rs 84,000 (12% of Rs 7 lakh). On this case, the whole quantity is eligible for deduction beneath Part 80C. To optimise the advantages beneath Part 80C, they might think about making extra investments in particular avenues like ELSS mutual funds or paying life insurance coverage premiums.
Now, if somebody earns an annual fundamental wage of, as an instance, Rs 15 lakh, their EPF contribution for the complete fiscal yr could be Rs 1.8 lakh (12% of Rs 15 lakh). Nonetheless, solely as much as Rs 1.5 lakh is eligible for deduction beneath Part 80C. The remaining Rs 30,000 is not going to qualify for the deduction. Therefore, when planning for tax saving investments beneath the previous regime, it’s essential to notice that the Part 80C restrict would have been consumed by EPF solely.
Voluntary Provident Fund (VPF) for enhanced financial savings
It is essential to say that people can contribute greater than the necessary 12% to their EPF account by means of the Voluntary Provident Fund (VPF). They will contribute as much as 100% of their fundamental wage to the EPF. If a person’s personal contribution to EPF is lower than Rs 1.5 lakh in a monetary yr, they’ll make extra contributions by way of VPF. These VPF contributions are additionally eligible for deductions beneath Part 80C.
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EPF Returns, liquidity, and taxation
- Curiosity is paid to EPF account holders on their contributions. The federal government publicizes the rate of interest each monetary yr, and for FY2023-24, it has been set at 8.25%. This charge is notified by the Finance Ministry earlier than the Workers’ Provident Fund Organisation (
EPFO ) begins crediting the cash to the EPF account. - Much like different tax-saving investments, EPF additionally has a lock-in interval. The EPF account matures on the time of the worker’s retirement, sometimes on the age of 58. Nonetheless, if an worker leaves their job and stays unemployed for 2 months thereafter, they’ll shut the EPF account and withdraw the accrued funds together with the curiosity.
- Moreover, the EPF scheme permits partial withdrawals for particular functions, topic to sure eligibility standards. For instance, withdrawals are allowed for buying a home after 5 years of membership, and for self, youngsters, and siblings’ marriages after 7 years of membership.
- Investments within the EPF account are tax-exempt beneath particular situations. Based on earnings tax legal guidelines, a person’s EPF contributions are tax-exempt, supplied withdrawals are made after 5 years of steady service. Nonetheless, withdrawals made earlier than finishing 5 years of service are taxable.
Curiosity earned on an worker’s EPF contribution is tax-exempt as much as a sure restrict. If the curiosity earned from the worker’s EPF contribution exceeds Rs 2.5 lakh in a monetary yr, it turns into taxable. Nonetheless, if the person’s EPF contribution stays under Rs 2.5 lakh in a monetary yr, the curiosity earned stays tax-exempt. This restrict has been raised to Rs 5 lakh for presidency workers.
Moreover, moreover the worker’s contribution, there’s additionally an employer’s contribution to the EPF account. If the overall contribution from the employer to EPF, superannuation fund, and Nationwide Pension System (NPS) exceeds Rs 7.5 lakh in a monetary yr, the employer’s contribution turns into taxable. Moreover, any curiosity, returns, or dividends earned on the surplus contribution will even be taxable.
