The last weeks of a financial year are stressful for many who do not maximise all the tax benefits at their disposal.
Income Tax Saving: It’s not unusual for people to make rash moves in a rush to save taxes during the last few weeks of the financial year. These last-minute steps might involve investing heavily in an instrument that might not bode well with your financial goals, and worse, end up undermining them. You should ideally try to strike a balance between your tax-saving tools and the requirements of your financial goals while closely analysing crucial factors like lock-ins, liquidity, flexibility, returns, risks, etc. before zeroing in on your chosen tax-saving tool.
The last weeks of a financial year are stressful for many who do not maximise all the tax benefits at their disposal. While some explore new avenues to save taxes, others end up taking impulsive financial steps based on hearsay. However, many overlook a super-safe tax-saving instrument right under their noses which actually garners better returns than even hot-favourites like the Public Provident Fund – yes, we’re talking about your Employees’ Provident Fund.
EPF investments offer tax-deduction benefit under Section 80C and carry minimal investment risk. So, you’ll be well-advised to hike your EPF investments to save taxes if doing so meets the requirements of your financial goals.
How does EPF work?
Under EPF, employees are mandated to save a portion of their salary towards building their retirement corpus. Salaried individuals who work in an organisation that is registered with the Employees’ Provident Fund Organisation (EPFO) are mandatorily required to contribute 12% of their basic salary and dearness allowance (DA) into their EPF accounts. So, suppose your basic salary plus DA is Rs 30,000 per month, you will be required to contribute Rs 3,600 per month or Rs 43,200 per annum towards EPF. However, you can actually increase this contribution up to Rs 1.5 lakh to complete your 80C investment needs through a single instrument. You can do so by investing additional funds in your EPF account through Voluntary Provident Fund (VPF) payments.
It will be worthwhile to note here that investments in the EPF, as well as the VPF, come under the Exempt-Exempt-Exempt category from the income tax perspective. EEE category means the amount that you invest is exempt from tax, the interest earned on such an investment is exempt from tax and the corpus that you will receive on maturity will also be exempted from the tax.
You can invest up to 100% of your salary (basic salary + DA) in VPF. However, the tax-deduction benefit is subjected to the 80C threshold (i.e. up to Rs. 1.5 lakh). This is another area, apart from the current higher returns, where VPF trumps PPF as the latter comes with an annual investment limit of Rs 1.5 lakh.
Why invest in EPF/VPF?
There is always a higher chance of committing a mistake when looking for a last-minute tax-saving instrument. You might end up buying a risky product, or an investment you don’t understand completely – things that might impact your financial goals.
This is where EPF investments can come in handy. EPF/VPF offers an extremely safe tax-saving investment option which is backed by the Government of India. It is also easy to invest money through VPF. You can always check with your finance team on how to make VPF contributions if your company doesn’t already have a built-in mechanism.
EPF is currently offering a return of 8.65% p.a. which is higher than fixed return tax-saving investments like PPF and the National Savings Certificate which are presently offering an interest of 7.9% p.a.
EPF Withdrawals: Important things to know
The subscribers get access to their EPF fund at the time of retirement or their nominees receive the fund on their untimely death. However, it is important to note here that you can withdraw money from your EPF account before retirement if you meet certain specific conditions. While you can withdraw 100% of your EPF money if you remain unemployed for more than 2 months, you can withdraw 50% of the employees’ share in the contribution for the marriage of self, children or siblings if you’ve maintained your EPF account for at least 7 years. The riders are identical if you want to withdraw your EPF to fund the higher education of self or your children. You can also withdraw 90% of the total EPF contributions for home loan repayment if your EPF account is at least 10 years old and if you meet other eligibility requirements. Similarly, there are other specific requirements to be met if you want to withdraw money from your EPF account to fund a medical emergency in your family, purchase or construction of a house and for home loan repayment.
Also, you can withdraw your VPF contributions at any time; however, doing so before the completion of 5 years is subject to taxes. You can also get a refundable loan against your EPF savings on meeting eligibility requirement’s which has to be repaid in monthly instalments.
Other important points to keep in mind
Interest rate revision: The interest rate on small saving schemes is revised by the government at the end of every quarter, whereas the interest rate on the EPF/VPF is usually revised once in a year. The interest rate on small saving schemes such as PPF has been revised already, whereas interest on EPF is yet to be reviewed, and there are chances that it can be reduced in sync with other tax-saving instruments.
Transfer of EPF accounts: Some people have the misconception that it’s difficult to transfer EPF accounts while changing jobs. The process of transferring the EPF is expected to become a completely automated process in the new fiscal year. At present, Universal Account Number (UAN) holders need to fill a form to transfer their EPF contribution along with the interest earned to a new employer.
In conclusion, it won’t be wrong to argue that EPF/VPF can be a great last-minute tax-saving tool for reasons mentioned above – however, only if doing so meets the requirements of your financial goals. Don’t forget to diversify your investments across different asset classes to minimise overall investment risk, and try linking your tax-saving measures to your financial goals in sync with your risk appetite. Lastly, while you can withdraw your EPF money to meet crucial financial requirements, it’s best to keep it undisturbed till your retirement age so that it gets ample time to swell into a big corpus that can build the foundation of your retirement funds.
(The author is CEO, BankBazaar.com)