How EPF Helps You Save On Tax!

EPF is a three-way tax-saving mechanism that may help you grow your retirement corpus via mandated employer contributions. Employee Provident Fund, or EPF, is a financial instrument provided to salaried persons in India. The system is intended to provide a retirement benefit to salaried workers.
If you're reading this, you must be employed, and EPF is almost certainly part of your benefits package. Let us explain how EPF can help you save money on taxes.

Employee Provident Fund (EPF) Definition

Employee Provident Fund (EPF) EPF is one of the most popular savings programmes created by the Government of India. The Ministry of Labour is responsible for overseeing EPF programmes in India.
The preliminary plan was established under the Employee Provident Fund, and Miscellaneous Provisions Act of 1952The Employee Provident Fund Organization oversees this savings programme (EPFO).
This plan seeks to provide a person with a sufficient retirement fund. It cultivates the practice of money management in paid personnel. Both the employer and the employee have made monetary contributions to the fund. They must donate 12% of the employee's basic wage (Basic + Dearness allowance) to this fund every month. The genuine contribution—from the employer and the employee—is given to the retiree in a lump sum together with interest. EPFO calculates the return on investment. Additionally, the claim is tax-free. The Indian government has mandated involvement in this project. Consequently, since the government oversees it, it is seen as a low-risk investment.

PF Account Number Definition

Employees will be assigned a Provident Fund (PF) account number by every firm registered with the EPFO. The PF number is a numerical code. It denotes the state, regional office, location, and PF member code. The PF trust manages the PF number. When a person moves to employment, their PF number changes.
A Universal Account Number (UAN) is a one-of-a-kind number assigned to PF members. When a person switches jobs, their PF account number changes. The UAN number, however, stays the same.

Employee Provident Funds (EPF) and Tax Savings

The following scenarios show the tax advantages of EPFs.
1. Deduction for Income Taxes
In most circumstances, an EPF account operates by allocating a percentage of your salary to your EPF account. The monthly payment to your EPF is tax deductible under the Income Tax Act of 1961, up to a maximum of Rs. 1.5 lakhs per year.
2. Exemption from taxation on your employer's contribution
Your employer, or the company you work for, also contributes to your EPF account. The whole amount contributed to your EPF account by your employer is tax-free.
3. Interest Is Tax-Free
Another advantage of having an EPF account is that the interest you earn is tax-free.
4. Withdrawals are not taxed.
Any withdrawal from your EPF account will be tax-free if you fulfil the minimum 5-year lock-in time requirement.

Advantages of Employee Provident Funds (EPF)

Aside from the tax benefit³, the EPF system offers many additional benefits.

• Long-Term Security: Through the EPF system, employees may save for a lifetime and get the benefit when they retire or become dependent.

• Savings for Unforeseen Circumstances: Because the employee has the option to withdraw money early, the EPF amount may be utilised in the case of an emergency.

  
  

• Security after Death: In the case of an employee's death, the employee's dependents are entitled to the employee's EPF money.

  
  

• Pension Benefits: As previously said, an employer contributes to a PF fund and a pension, both of which are advantageous during the post-retirement period.

  
  

• Insurance Coverage: In the absence of group insurance, the EPF offers employee life insurance. This strategy ensures that workers are sufficiently protected.

Interest Rate on Employee Provident Funds

The current EPF interest rate is 8.10% p.a. for the fiscal year 2021-22. This interest rate is computed monthly and remitted to Employee Provident Fund accounts on March 31st. The interest generated on EPF is tax-free.
The Government of India (GOI) and the Central Board of Trustees have predetermined this rate (CBT). CBT governs the Act. The interest rate issued by the GOI is effective for a fiscal year, which runs from April 1st of one year to March 31st of the following year.
If no contributions are made to the EPF account for three years, the account becomes inactive or dormant. Even in such cases, interest is paid on the employee's EPF account until the employee retires. However, retiring workers do not get interested in inactive tabs. The interest collected on inactive accounts is taxed at the employee's marginal tax rate.
As a result, the employer's contribution to the Employee Pension Scheme (EPS) does not earn interest. However, a member is only entitled to a pension after age 58.

Reasons to Choose EPF

In some firms, EPF is optional rather than required. However, if given the option, you must choose the same. This is because EPF is an excellent financial instrument with much flexibility that allows workers to save money on taxes.
Some of the most notable advantages of investing in an EPF account are:

• EPF is regarded as a long-term investment vehicle.
• It maintains financial stability and provides financial assistance throughout retirement.
• It provides guaranteed⁴ returns on investments. Once the government declares the rate, interest will undoubtedly build in your account depending on the EPF corpus.
• Both you and your employer contribute to the plan. As a result, it allows you to build up a sizable financial nest egg for when you retire.
• EPF also provides tax benefits³.
  

Thus, those above are the primary reasons for investing in EPF. The following are the tax advantages that workers get from their EPF investments:

• Section 80C of the Income Tax Act allows you to deduct up to Rs. 1,50,000 from your donation.
• The interest gained on the EPF contribution is tax-free in its entirety.
• Money removed from an EPF account is not subject to income tax if withdrawn after the five years have expired. Employees must pay a set proportion of income tax if they prematurely take funds from their EPF account.
  

Overall, EPF is a win-win situation in every way, particularly since it has the unique EEE tax advantage, i.e., it is exempt at the time of investment under U/S 80C, the interest is exempt from income tax, and the maturity amount is likewise wholly tax-free. How many financial products in the nation provide all of these tax advantages?

EPF: The Ideal Retirement Plan

Thus, the Employee Provident Fund is a critical financial instrument since it allows for tax-free savings and aids in accumulating a sizable retirement fund. This retirement corpus is established based on contributions made in the EPF account.
Still, you must contribute at least 12% of your basic pay to guarantee considerable development of money that will provide financial assistance to you and your family in the post-retirement period.
Aside from helping to establish a retirement corpus, EPF also helps to save income tax since all interest received on investments, employer contributions, and withdrawals after five years are tax-free.

Breakdown of EPF Contributions

Contributions made to an EPF account are also eligible for EPF pensions. An EPF contribution comprises two parts: employee contributions and employer contributions.
Essentially, the workers' contribution is invested in the provident fund, while 8.33% of the employers' contribution is allocated to EPF, and the remaining amount is returned to the EPF account.
As a result, you are entitled to receive a pension from the amount deposited by your employer to your EPF account. It should be noted that the amount of assistance is determined by two significant factors:

• The total number of service years
• The average wage earned in the year before retirement. EPF also provides insurance benefits to workers in organisations when no group insurance programme is available. Employees may profit from insuring themselves and their family members under the EPF's EDLI plan.

Conclusion

Employees' Provident Fund (EPF) is a retirement benefit system in which all salaried employees may participate by saving a portion of their monthly wage, which they can take upon retirement, disability, illness, or unemployment. EPF contributions also yield interest.
During the fiscal year 2023-24, the EPF interest rate is 8.15%, which offers reasonable returns and helps you develop a corpus that you may use to meet your post-retirement obligations.
EPF not only meets your post-retirement expenses but also provides tax advantages. The employee's contribution is tax deductible up to Rs 1.5 lakhs under section 80C of the Income Tax Act of 1961. The employer's contribution is tax-deductible. The interest gained on EPF contributions is likewise tax-free. After five years of service, you may also get a tax break on your withdrawals.

https://www.coverfox.com/personal-finance/tax/how-epf-helps-you-save-on-tax/⁵

https://www.insurancedekho.com/life-insurance/news/how-epf-helps-you-save-on-tax-3240/⁶

https://blog.bankbazaar.com/how-epf-helps-you-save-on-tax/⁷

https://scripbox.com/saving-schemes/employee-provident-fund/⁸