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EPF as a Tax Saving Tool

The Employees’ Provident Fund (EPF) is a retirement benefit scheme, available to all salaried people in India. It is a savings tool for the workforce. The EPF scheme is managed by the Employees’ Provident Fund Organisation (EPFO) under the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952. The Employees’ Provident Fund Organisation (EPFO) administers EPF Scheme 1952, Employees Pension Scheme 1995 (EPS) and Insurance Scheme 1976 (EDLI).

Why you should Invest in EPF?

Tax Benefits for EPF Investment

Following are the tax benefits that you can avail, upon opting for EPF investment.

Tax Deduction for Investment in EPF

The employee’s contribution towards EPF is eligible for tax deduction under section 80C of the Income Tax Act, 1961. The maximum limit for tax deductions is up to Rs 1.5 lakhs. An Employee has to contribute up to 12% of your salary (basic salary plus dearness allowance).

Suppose, you have an annual salary of Rs 3,00,000, you can contribute up to Rs 36,000 (12% of salary) and avail tax deductions. Upon contributing Rs 36,000 in EPF, you can simply deduct this amount from your taxable income.

Moreover, the EPF Act also allows you to make VPF (voluntary provident fund) contribution over & above the 12% in EPF. The VPF contribution can also avail the benefit of a tax deduction under section 80C, within the overall annual ceiling of Rs 1.5 Lakhs.

Tax Exemption

You can avail tax exemption on the employer’s contribution, interest earned and the withdrawal amount as well.

Tax on Premature Withdrawals

In case you withdraw money before 5 years, the entire contribution (your contribution and your employer’s contribution) and the interest accrued will become taxable. Five years of service include the total years of service, not necessarily with the same employer.

Tax Benefits in EPFImpact of Withdrawal before 5 years
Employee’s Contribution (including VPF)Tax deduction under section 80CThe deduction claimed under section 80C becomes taxable
Employer’s ContributionTax freeTaxable as salary
Accrued InterestTax freeTaxable as other income

TDS on withdrawing EPF balance will be deducted, when the withdrawal is more than Rs 50,000, w.e.f June 1st 2016. Earlier this withdrawal limit was Rs 30,000. 10% TDS will be deducted, when PAN is submitted. Otherwise, 34.608% TDS is applicable, when PAN is not submitted.

Key Aspects You should Know About EPF

Before you invest in EPF, it would be a wise move to understand its key aspects

1. Eligibility

As per rules, the EPF benefits are extended to establishments which has at least 20 employees. Once registered, a business can still continue with EPF scheme, even if the employee count falls below 20 persons.Under EPF, all employees (including contract, temporary and daily rated employees) whose monthly salary is less than or equal to Rs 15,000 at the time of joining is eligible to become a member of EPF scheme. However, an employee whose monthly salary is more than Rs 15,000 can also become a member by obtaining permission from the Assistant PF Commissioner.

2. Contribution

The contribution paid by the employee is 12% of basic salary, dearness allowance and retaining allowance. An equal contribution is also required to be payable by the employer.

Suppose, you have the monthly basic salary (including DA and other allowances) of Rs 30,000, the employee’s monthly contribution would be Rs 3,600 (12% of basic pay) and the equal amount is contributed by your employer as well. 

 The employee also has the option to contribute at a higher rate, but in such case employer is not liable to pay at such a higher rate.

The contribution is restricted to 10%, in case an establishment employs less than 20 employees, any sick industrial company as declared by the Board for Industrial and Financial Reconstruction, any establishment which has accumulated losses equal to or exceeding its entire net worth at the end of the financial year, and any establishment engaged in industries namely, jute,brick, coir and guar gum factories.

3. Diversion of Employer’s Contribution

The employee’s contribution is entirely added towards EPF, however, all of the employer’s contributions don’t go into EPF kitty. Out of the entire employer’s contribution, 8.33% is diverted to the Employees’ Pension Scheme (EPS) and the remaining 3.67% is invested in EPF.

The proportion of the employer’s contribution to EPS is calculated on Rs 15,000. It means, even if the employee’s salary is Rs 15,000 or more, the EPS contribution is Rs 1,249.50 (8.33% of 15,000) per month. The balance amount is invested in the EPF scheme.

ContributionEmployeeEmployer
Employees’ Provident Fund (EPF)12%3.67%
Employees’ Pension Scheme (EPS)Nil8.33%

4. Interest Rates

A fixed Interest Rate is applied under a financial year under EPS scheme. During financial year 2016-17, rate of interest on EPF is 8.65%.

EPF Rate of Interest Over the Last Five Years

YearRate of Interest
2016-178.65% p.a
2015-168.80% p.a
2014-158.75% p.a
2013-148.75% p.a
2012-138.50% p.a

The interest is calculated on the basis of monthly balance at the end of the month. The accrued interest under the EPF account is entirely tax-free.

5. Higher Voluntary Contribution

The employee has the option to pay the higher contribution on a voluntary basis, above the fixed 12% of basic salary. You are allowed to contribute the entire salary towards VPF. You can increase your VPF contribution at any point during your employment. This Voluntary Provident Fund (VPF) contribution earns tax-free interest.

6. Withdrawal

You have the option to withdraw the EPF balance after 58 years, before 58 years or can get EPF advances as well.

It is advisable to withdraw the EPF balance after five years of service, else your withdrawal amount will be considered as taxable amount in the year of receipt. When you switch the job, it’s advisable to transfer the balance to the new employer. In case, you switch the job after 2 years of service, it’s better to transfer the PF balance to the new employer and withdraw it only after 5 years of service.

Universal Account Number (UAN)

Pensions

You can start receiving pension under EPS after rendering a minimum service of 10 years and attaining the age of 58 years. After attaining the age of 58 years, an EPF member can receive the pension while in service, however, he/she ceases to be a member of EPS automatically.You also become eligible to receive pension upon attaining the age of 50 years. Early pension (pension amount after 50 years, but before 58 years of age) is reduced by 4% for every year, falling short of 58 years.

Bottom Line

Employees’ Provident Fund (EPF) is a retirement benefit scheme and all salaried employees can contribute by saving a fraction of their salary every month that you can withdraw upon retirement, disability, sickness or unemployment. The contributions in EPF also earn interest. The EPF interest rate is 8.65% during financial year 2016-17, which ensures decent returns and help you to build a corpus that you can utilize to fulfill your post-retirement needs.

In addition to fulfilling your post-retirement needs, EPF also offers you tax benefits. The employee’s contribution is tax deductible up to Rs 1.5 lakhs under section 80C of the Income Tax Act, 1961. The employer’s contribution is tax-exempted. The interest earned on EPF contributions is also tax free. You can also avail tax exemption for the money you withdraw, after 5 years of service.