PF Tax Benefit: The maximum limit of Section 80C is Rs 1.5 lakh per financial year and there are several investments, expenses including PF contributions of an employee that are eligible for tax benefit under this Section.
If you as a salaried individual are looking to save tax under Section 80C of the Income Tax Act, 1961, you need to take a close look at your salary slips. For a salaried employee, the monthly contributions made towards employees’ provident fund (EPF) also qualifies for tax benefit under Section 80C. The maximum limit of Section 80C is Rs 1.5 lakh per financial year and there are several investments and expenses that are eligible for tax benefits under this section including PF contributions of an employee.
It is, therefore, important for a salaried individual to estimate the total contributions for the entire financial year and then calculate the balance within the Section 80C limit that remains to be invested. This will give an idea of how much tax benefit can be availed under section 80 C.
PF contribution calculation
You can calculate the total PF contributions from the monthly salary slip since April till date or till March of the next year if other factors remain the same. For example, if someone has a basic salary of Rs 25,000, the monthly contribution towards PF is Rs 3,000 ( 12 per cent of basic salary).
So, effectively, the total annual PF contribution that qualifies for section 80C will be Rs 36,000. PF represents voluntary savings and automatically helps in saving taxes.
In the above example, the employee will now have Rs 1.14 lakh of the maximum available limit of Rs 1.5 lakh under section 80C. Similarly, if the basic salary is Rs 50,000, the total employee contribution towards PF will be Rs 72,000 while the employee will have to invest balance Rs 78,000 for saving taxes.
Watch: How To Withdraw PF Online
For the year 2018-19, the interest rate on employees’ provident fund (EPF) balance is 8.65 per cent. The PF calculation is based on the monthly running balance in the employee’s account and the interest is credited at the end of the financial year or is paid when the employee leaves the membership of the fund.
PF contribution is not only eligible for tax benefit but also comes with tax benefit during the growth stage and final corpus. Provident Fund, therefore, enjoys E-E-E- tax benefit. The interest earned is tax-free and PF money received on superannuation or early retirement is tax-free, provided the full withdrawal is after five years of continuous service.
So, before you start looking for different tax-saving investments, first find out how much of tax-saving investment is already exhausted from PF contributions before considering other tax savers under Section 80C.