Are you looking for ways to save on taxes while securing your future? The Employee Provident Fund (EPF) might just be the perfect solution for you. Not only does EPF offer a steady way to build your retirement savings, but it also provides significant tax benefits that can help reduce your financial burden today. In this guide by Paisaseekho, we break down how EPF can help you maximise your savings and make the most of your hard-earned money.
What is EPF?
The Employee Provident Fund (EPF) is a retirement benefits scheme for salaried employees managed by the Employees’ Provident Fund Organisation (EPFO). Every organisation with 20 or more employees must register under EPFO, and even those with fewer than 20 employees can do so voluntarily.
All employees, including contractual workers, earning up to ₹15,000 per month are eligible for EPF contributions, which must be made by both the employee and the employer. If an employee earns more than ₹15,000, they can still contribute to EPF with their employer’s consent. Once registered, both the employee and employer contribute to the EPF account, helping the employee accumulate a retirement corpus over time.
EPF Interest Rate for FY 2023-24
The government has increased the EPF interest rate to 8.25% for the financial year 2023-24, making it an attractive savings option with guaranteed returns.
Important Features of the EPF Scheme
- Contribution Requirements: Employees must contribute 12% of their basic salary + Dearness Allowance (DA) or a flat ₹1,800 (whichever is lower) towards EPF, while the employer must match this contribution. However, some organisations with fewer than 20 employees may contribute at a lower rate of 10%.
- Voluntary Contributions: Employees can also make additional contributions through the Voluntary Provident Fund (VPF). However, employers are not obligated to match any contributions made above the mandatory 12%.
- Interest on Contributions: The EPF interest rates are set by the government every year, with the interest for FY 2023-24 being 8.25%. Interest is credited to the EPF account at the end of the financial year, providing an opportunity for compound growth.
- Lump-Sum Payout on Retirement: Upon retirement, employees receive a lump-sum payout that includes contributions from both the employer and employee, as well as accrued interest.
Taxation Rules for EPF Contributions
1. Tax Deduction on Employee Contributions
Employee contributions to the EPF account qualify for a tax deduction under Section 80C of the Income Tax Act, up to ₹1.5 lakh per year. This helps reduce taxable income, allowing employees to save significantly on taxes.
2. Employer Contributions and Taxability
From FY 2020-21 onwards, employer contributions to EPF, National Pension Scheme (NPS), and/or superannuation funds that exceed ₹7.5 lakh in a financial year will become taxable in the employee’s hands.
3. Tax on Interest on EPF Contributions Exceeding ₹2.5 Lakh
As per the Budget 2021 amendment, the interest earned on an employee’s contribution to EPF above ₹2.5 lakh in a financial year is taxable. The interest on employer contributions remains tax-free. This threshold also applies to contributions made via VPF.
Example
For example, if an employee earns a basic salary of ₹50,000 per month and contributes 12% to EPF, their yearly contribution will be ₹72,000. If the same employee voluntarily contributes an additional ₹3.28 lakh through VPF, their total contribution for the year will be ₹4 lakh. The interest on the excess contribution of ₹1.5 lakh (₹4 lakh – ₹2.5 lakh) will be subject to tax.
For government employees contributing to the General Provident Fund (GPF), the threshold limit is increased to ₹5 lakh.
Tax Deduction at Source (TDS) on EPF Interest
TDS is applicable on the interest earned from EPF contributions exceeding the threshold limit during the financial year. TDS is deducted at 10% if the EPF account is linked with a valid PAN and at 20% if it is not. For non-residents, TDS is deducted at 30% as per Section 195 of the Income Tax Act.
How to Calculate Taxable EPF Interest?
From FY 2021-22 onwards, the EPFO maintains two separate accounts for EPF subscribers: one for taxable contributions and one for non-taxable contributions. Interest earned on the taxable portion is subject to tax, while the interest on the non-taxable portion remains exempt.
How EPF Helps You Save on Tax!
- Tax Savings on Contributions: Employee contributions qualify for tax deductions under Section 80C.
- Tax-Free Interest on Contributions Below ₹2.5 Lakh: Interest earned on contributions up to ₹2.5 lakh in a financial year is tax-free.
- Employer Contributions: While employer contributions are subject to limits, they offer tax benefits, allowing employees to accumulate retirement savings without an additional tax burden.
At Paisaseekho, we believe in helping individuals make informed financial decisions. By leveraging the benefits of EPF, you can effectively reduce your tax liability while securing your retirement. Visit Paisaseekho to learn more about various tax-saving strategies and get insights on how to grow your wealth.
Conclusion
The Employee Provident Fund (EPF) is not just a tool for building retirement savings, but also a powerful way to save on taxes. Understanding the nuances of EPF contributions, interest rates, and tax implications can help you maximise your savings and avoid any surprises at tax time. With a bit of planning and awareness, EPF can be your ally in saving for both the present and the future. For more financial insights and tax-saving tips, head to Paisaseekho and get started on your journey to financial freedom!
FAQs
1. What is the current interest rate on EPF for FY 2023-24?
The interest rate on EPF for FY 2023-24 is 8.25%.
2. What is the tax exemption limit for EPF interest?
For non-government employees, interest earned on EPF contributions up to ₹2.5 lakh in a financial year is tax-free. For government employees contributing to the GPF, the limit is ₹5 lakh.
3. How much TDS is deducted on EPF interest?
TDS is deducted at 10% if your EPF account is linked with PAN. If not linked, the TDS rate is 20%. For non-residents, TDS is deducted at 30%.
4. What is VPF, and how does it work?
Voluntary Provident Fund (VPF) is an additional contribution made by the employee beyond the mandatory 12% EPF contribution. The employer is not required to match this contribution, and the interest earned is the same as that on EPF.
5. Is employer contribution to EPF taxable?
Employer contributions to EPF, NPS, and/or superannuation exceeding ₹7.5 lakh in a financial year are taxable in the employee’s hands.
6. Can I contribute more than 12% of my basic salary to EPF?
Yes, you can contribute more than 12% of your basic salary through VPF. However, the employer is not obligated to match any contribution above the statutory 12%.
7. How do I calculate the taxable portion of my EPF interest?
The EPFO maintains two separate accounts for taxable and non-taxable contributions. The interest earned on the taxable portion is subject to tax, while the interest on the non-taxable portion remains exempt.
8. What happens if I withdraw EPF before completing five years of service?
If you withdraw your EPF balance before completing five years of continuous service, the entire amount, including employer contributions and interest, becomes taxable, and TDS will be deducted.
9. Is EPF interest credited monthly or annually?
EPF interest is credited annually at the end of the financial year.
10. How does EPF help me save taxes under Section 80C?
Employee contributions to EPF are eligible for tax deductions under Section 80C, allowing you to reduce your taxable income by up to ₹1.5 lakh each year.
