However, there are only two categories of individuals who should worry about last-minute tax-savings investments – a) those who have opted for the old tax regime and pan to continue with the same while filing ITR this year and b) those who are planning to switch from the new to old tax regime while filing ITR.
Also Read: How to switch from new to old tax regime?
From April 1, 2023, the new tax regime has become the default tax regime. So, if an employee does not inform the employer of his/her tax regime preference at the start of the financial year, then TDS on salary will be deducted based on the new tax regime.
However, before doing calculations for fresh tax-saving investments, salaried individuals generally tend to forget about the tax-saving investment that happens automatically even before the salary is credited into their bank accounts. We are talking about the Employees’ Provident Fund or EPF.
An individual’s contribution to the EPF is deducted from his/her salary before it is credited to the bank account. An employee’s contribution to the EPF account is eligible for deduction under Section 80C of the Income Tax Act, 1961.
Read on to know more about EPF as a tax-saving investment tool.
Maximum contribution to the EPF account
According to the EPF scheme, an employee contributes 12% of his basic salary to the EPF account. The employer also makes a matching contribution to the EPF account. But the tax benefit on EPF investment under Section 80C is available only on the employee’s contribution, and not on the employer’s contribution.
Do note that there is no monetary limit (only a percentage limit) on the amount of money that can be deposited by an employee in the EPF account. However, Section 80C allows a deduction (from gross total income) of only up to Rs 1.5 lakh in a financial year.
Here is an example to understand this. An individual having a yearly basic salary of Rs 7 lakh will contribute Rs 84,000 (12% of Rs 7 lakh) to the EPF account in the full financial year. Here, the full amount is eligible for deduction under Section 80C. To maximise the benefit of deduction under Section 80C, additional investments in specified avenues such as ELSS mutual funds, payment of life insurance premium, etc., are required.
Similarly, an individual having an annual basic salary of, say, Rs 15 lakh will contribute Rs 1.8 lakh (12% of Rs 15 lakh) to the EPF account in a full FY. Here, only up to Rs 1.5 lakh is eligible for deduction under Section 80C. The balance of Rs 30,000 will not be eligible for the deduction.
Do note that an individual can also contribute more than the mandatory 12% to the EPF account. This can be done via Voluntary Provident Fund (VPF). An individual can contribute up to 100% of his basic salary to the EPF account. If an individual’s own contribution to EPF is less than Rs 1.5 lakh in a financial year, then he can make additional contributions via VPF. The VPF contributions will also be eligible for deductions under Section 80C.
Returns from EPF investment
Interest is paid to EPF account holders on the contributions made by them. The government announces the interest rate every financial year. It has announced 8.25% for the current financial year i.e., FY2023-24. The interest rate must be notified by the Finance Ministry before the Employees’ Provident Fund Organisation (EPFO) starts crediting the money to the EPF account.
Liquidity of EPF investments
Like all other tax-saving investments, EPF also comes with a lock-in period. The maturity of an EPF account happens at the time of retirement of an employee – at the age of 58. However, if an employee leaves a job and does take up employment for two months after leaving, he can close the EPF account and withdraw the accumulated money and interest.
The EPF scheme also allows an individual to make partial withdrawals from the EPF account. However, such partial withdrawals are allowed for specific purposes and the withdrawer has to meet certain eligibility criteria. For instance, the scheme allows withdrawal for purchasing a house after 5 years of membership, and for marriage of self, children and siblings after 7 years of membership.
Taxation of EPF investments
The investment made in the EPF account is exempt from tax subject to certain conditions. According to income tax laws, an individual’s own EPF contribution is exempt from tax, provided withdrawal is done after 5 years of continuous service. Withdrawal made before the completion of five years of service will be taxable.
Interest earned on an employee’s own EPF contribution will be exempted from tax subject to an annual limit. Interest earned from the employee’s EPF contribution exceeding Rs 2.5 lakh in a financial year will be taxable. However, if the individual’s EPF contribution does not exceed Rs 2.5 lakh in a financial year, then interest will be tax-exempt. The Rs 2.5 lakh limit has been increased to Rs 5 lakh in case of government employees.
Apart from an employee’s own contribution, there is an employer’s contribution as well to the EPF account. If the employer’s aggregate contribution to EPF, superannuation fund and National Pension System (NPS) exceeds Rs 7.5 lakh in a financial year, the employer’s contribution will also be taxable. Further, any interest, returns or dividend earned on the excess contribution will also be taxable.
“Unintentional Tax-Saving Investments Commonly Overlooked by Salaried Employees”
However, only two categories of individuals need to be concerned about last-minute tax-saving investments – a) those who have chosen the old tax regime and plan to stick with it while filing their ITR this year, and b) those who are considering switching from the new tax regime to the old one when filing ITR.
Also Read: How to switch from new to old tax regime?
Starting April 1, 2023, the new tax regime has become the default option. If an employee does not inform their employer about their tax regime preference at the beginning of the financial year, TDS on their salary will be deducted based on the new tax regime.
However, before calculating new tax-saving investments, salaried individuals often overlook the automatic tax-saving investment that occurs before their salary is deposited into their bank accounts – the Employees’ Provident Fund (EPF).
An individual’s contribution to the EPF is deducted from their salary before it reaches their bank account and is eligible for deduction under Section 80C of the Income Tax Act, 1961.
Find out more about EPF as a tax-saving investment tool.
Maximum EPF Contribution
According to the EPF scheme, an employee contributes 12% of their basic salary to the EPF account, with the employer matching this contribution. However, the tax benefit under Section 80C is applicable only to the employee’s contribution, and not the employer’s contribution.
There is no monetary limit on the amount an employee can deposit in the EPF account, but Section 80C allows a deduction of up to Rs 1.5 lakh in a financial year.
For example, an individual with a yearly basic salary of Rs 7 lakh will contribute Rs 84,000 (12% of Rs 7 lakh) to the EPF account, fully eligible for deduction under Section 80C. To maximize this deduction, additional investments in avenues like ELSS mutual funds and life insurance premiums are required.
Similarly, an individual earning Rs 15 lakh annually will contribute Rs 1.8 lakh to the EPF account, but only Rs 1.5 lakh is eligible for deduction under Section 80C. Additional contributions can be made through Voluntary Provident Fund (VPF), also eligible for deductions under Section 80C.
EPF Investment Returns
EPF account holders earn interest on their contributions, with the current financial year’s interest rate set at 8.25%. The interest rate must be notified by the Finance Ministry before the money is credited to the EPF account.
Liquidity of EPF Investments
EPF investments have a lock-in period and mature when the employee retires at 58. Partial withdrawals are allowed for specific purposes after meeting eligibility criteria.
Taxation of EPF Investments
EPF contributions are exempt from tax if withdrawn after 5 years of continuous service. Interest earned on contributions exceeding Rs 2.5 lakh in a financial year is taxable. Employer contributions exceeding Rs 7.5 lakh in a year are also taxable.
