EPF or the Employee Provident Fund is a retirement benefits scheme under which an employee has to contribute a certain sum towards the EPF account, and a matching contribution has to be made by the employer. Now, at the time of the employee’s retirement, he/she gets a lump sum amount of all the contributions made along with interest.
Since contribution to EPF is eligible for claiming deduction under section 80C, this retirement benefits scheme can also help you earn a tax break. Now, to answer questions, such as what section 80C is and how you can use it to your benefit, here is a complete outline of section 80C and EPF:
What is Section 80C of the Income Tax Act?
Section 80C of the Income Tax Act is a provision that pins down numerous investments and expenditures that are exempted from income tax. It permits a maximum deduction of INR 1.5 lakh from the total taxable income of an assessee and is only applicable to individuals and Hindu Undivided Families.
Are There any Exemptions to Keep in Mind?
Specific expenditures and contributions are eligible for claiming deductions under section 80C. Keeping these exemptions in mind while filing for your income tax return would help you in lowering your total tax liability. Here are a few exceptions mentioned under section 80C:
1. Premium Paid Towards Life Insurance
If you have purchased life insurance in your name or the name of your spouse or children, then the premium you pay towards it would be eligible for claiming deduction under section 80C.
However, if you have multiple life insurance policies from several insurers, you are permitted to pool all the paid premiums and get a deduction up to a maximum of INR 1.5 lakh per annum.
2. National Savings Certificate (NSC)
The National Savings Certificate is amongst the most lucrative tax-saving schemes of section 80C for the risk-wary taxpayers of India. With its maturity period ranging from five-ten years, the National Savings Certificate offers an interest rate of 6.8% p.a.
Interest on the National Savings Certificate is compounded semi-annually and is added to the initial investment. With the added interest also becoming eligible for claiming a tax-break, the NSC is for anyone who’s looking for a safe investment avenue. The maximum deduction you can claim from NSC is INR 1.5 lakh per annum.
3. Employee Provident Fund (EPF)
The total amount contributed by the employee towards the EPF is eligible for claiming deduction under section 80C. However, such exemption can be availed up to a maximum amount of INR 1.5 lakh.
If the employee withdraws his/her EPF balance after five years of continuous employment with the same employer, the entire amount (including the interest) would be tax-free. We would discuss this in detail in the latter part of this guide.
Hence, the Employee Provident Fund doesn’t only serve as a tax-saving instrument, but it also helps in ensuring higher earnings after retirement.
4. Repayment of the Principal Amount of Home Loan
If you have taken a home loan, then the monthly amount you pay towards its principal amount is eligible for claiming deduction under section 80C. However, keep in mind that the repayment of your home loan has two components- the interest amount and the principal amount.
While the interest amount does not qualify for claiming a deduction, the principal amount is eligible for getting the deduction under 80C. Again, the maximum amount of deduction you can claim is up to INR 1.5 lakh p.a.
5. Sukanya Samriddhi Scheme
Individual taxpayers can open a Sukanya Samriddhi account for their girl child with the condition that the account has to be opened anytime between the date of her birth to the day she turns ten years old.
The minimal contribution is fixed at INR 1,000, while the maximum limit is set at INR 1.5 lakh in a financial year. Within this scheme, the interest is both calculated and compounded on an annual basis. It is important to note that the interest earned under this scheme would also qualify for claiming deductions under section 80C.
6. Unit Linked Insurance Plans (ULIPs)
ULIPs refer to insurance policies that offer individuals the opportunity of both wealth creation and life cover. Under this scheme, a part of your contribution is diverted towards a life cover while the rest is transferred to a fund that invests in debt, equity, or both.
Apart from serving two purposes, your contribution towards ULIP plans would also get exempted under section 80C. But the maximum deduction you would qualify for would be up to INR 1.5 lakh p.a. Hence, through ULIPs, you would be able to avail of three benefits- getting a life cover, long-term wealth creation, and tax exemption.
7. Equity Linked Savings Scheme (ELSS)
Several mutual fund schemes have been set up to give tax-breaks to individual taxpayers. One such mutual fund scheme is the ELSS or Equity Linked Savings Scheme.
ELSS is a type of mutual fund that invests in equity or the stock market. With a lock-in period of three years, this scheme can be used for creating wealth in the long-term and can also serve as a tax-saving instrument under section 80C. The maximum deduction you can claim through ELSS is INR 1.5 lakh p.a.
Apart from these, other exemptions mentioned under section 80C include investment in infrastructure bonds, five-year post office time deposit scheme, and NABARD rural bonds.
Is EPF Withdrawal Tax-free?
Yes, EPF withdrawal is tax-free if the balance from the EPF account is withdrawn after five years of continuous service with the same employer.
However, if the withdrawal is made before five years of continuous service and the amount is more than INR 50,000 or if the Form 15H or 15G is not submitted, the entire amount of EPF would be subjected to TDS or tax.
You can lower your total tax liability by investing in EPF and through other provisions and clauses mentioned under section 80C. By investing in Employee Provident Fund, you won’t only get a fruitful retirement benefits scheme but also get a productive tax-saving instrument!