How investments in EPF scheme can help you save on tax

The Employees Provident Fund (EPF) investment is a retirement savings scheme. However, its contributions offer several tax benefits, making it an effective tool for saving on taxes.

Contributing a portion of your salary to the EPF account every month allows you to enjoy multiple tax benefits and ensure a financially secure future.

Investing in EPF qualifies for tax deduction under section 80C of the Income Tax Act. An individual can claim a deduction for his contribution towards the EPF account up to Rs 1.5 lakh in a financial year. This means that an EPF subscriber can reduce his or her taxable income by up to Rs 1.5 lakh by making contributions to the EPF account, thereby reducing his overall tax liability.

In addition to the deduction on contributions, the interest earned on the EPF balance is also tax-free as long as it does not exceed the rate specified by the government. Currently, the rate of interest on EPF is more than 8.25%. The Employees’ Provident Fund Organisation (EPFO) has fixed the interest rate on the employees’ provident fund for 2023-24, a three-year high.

Thus, not only does your money grow with a high-interest rate, but the growth is also tax-free, which means you can accumulate a large corpus over time. Moreover, the final amount received upon retirement or surrender of the EPF account after the stipulated period of time is also exempted from tax. This ensures that your retirement savings are wholly at your disposal when you need them the most.

On the other side, if the contribution exceeds Rs 2.5 lakh (Rs 5 lakh for government employees), only the interest earned on the amount up to Rs 2.5 lakh remains tax-free. The interest on the exceeding amount is taxable.

However, it’s very important to note that if you withdraw your EPF corpus before five years of continuous service, the amount you have withdrawn will be taxable. Therefore, you must consider EPF as a long-term investment strategy.

Thus, by investing in EPF, an individual does not only save for a secure future but also enjoys the advantage of reduced tax liability during the earning years. The dual benefit of saving and tax planning makes the EPF scheme a beneficial financial tool for every individual who earns. It, therefore, serves a dual purpose and is a worthy addition to any long-term financial planning strategy.

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