Every year during Diwali, rumors grow as EPFO (Employee Provident Fund Organization) subscribers get their interest from the previous year credited to their EPF accounts. This year was no different.
It is designed to help employees build retirement capital by deducting 12% of their base salary each month, and is popular for the guaranteed returns and tax benefits it offers.
Here is a guide to understanding the basic features and benefits of EPF.
How is the interest rate calculated for an accounting year?
Every March, the EPFO Central Board, under the supervision of the Labor Department, fixes the interest rate for the year. This is then approved by the Treasury, clearing the way for the Department of Labor and EPFO to credit employee accounts with interest. For the 2021-2022 tax year, the interest rate is 8.1% and the interest should soon begin to appear on employee EPF accounts.
How do I check my EPF balance?
Your EPF booklet shows your EPF balance, including interest credited. You can view your EPF balance by logging into the EPFO Member Portal with your UAN (Universal Account Number assigned to your account) and password. If you have not yet registered or activated your UAN on the portal, you must do so first. The other method is to send “EPFOHO (tu) UAN” from your registered cell phone number to 7738299899. You can also make a missed call to 011-22901406 to find out your balance.
Should I keep paying my Voluntary Pension Fund (VPF) contributions now that interest rates are rising and other interest rate instruments are becoming attractive?
Your employer must withhold 12% of your base salary as a contribution to your pension fund. However, you can voluntarily make a larger contribution. This VPF contribution accrues the same interest rate and enjoys the same tax benefits as the EPF.
However, if your total contribution (voluntary or not) exceeds Rs 2.5 lakh per annum, the accrued interest will be taxed at the fixed rate applicable to you. “For those in the top tax bracket, the effective return drops to around 5.58%. Given the rate hike scenario, there are other instruments that can generate higher returns. The National Pension System (SNP) can be considered”, says Preeti Zende. , SEBI Registered Investment Advisor, Founder of Apnadhan Financial Services.
However, it is still a highly preferred option for those whose total contribution does not exceed Rs 2.5 lakh per year. “If your combined mandatory and voluntary contributions don’t exceed this limit, you should continue with VPF,” he adds.
An 8.1% yield is not only better than most other fixed-income instruments, but it is also risk-free. “It is insured and tax-free (up to Rs 2.5 lakh per annum). There is no better tool than this for those whose total contribution is capped at Rs 2.5 lakh,” says Mr Agarwal, founder of Finsafe India.
What tax benefits do the EPF and VPF offer?
Your contribution of 12% of your base salary is Section 80C deductible, subject to the total limit of Rs 1.5 lakh, under the tax advantage scheme. Interest earned during the term and final maturity body are also tax-free.
However, if your total contributions exceed Rs 2.5 lakh per year, interest earned on that amount will be taxed at the marginal rate for that financial year. Your voluntary contributions are also tax privileged, as long as the limits are not exceeded.
If your employer contribution (also 12% of your base salary) exceeds Rs 7.5 lakh per annum, the excess amount is taxable in your hands.
Can I take direct debits from EPF to buy a house?
If you can. Your pension fund is locked until you retire, but the EPFO stipulates certain conditions under which you can make partial and early withdrawals.
Buying a home, treating serious illnesses, and educating yourself, your spouse, and your children are valid reasons to allow partial withdrawals. To buy a home, you can get up to 36 times your base salary plus your decommissioning allowance to finance the home purchase (or the balance or actual cost, depending on the amount).