How to Save Income Tax with investment in EPF and PPF

ITR deadline is fast approaching? And you want to save your income tax? Then you have landed on the right page. Most of us are aware of the deductions accessible by the taxpayers under Section 80C. Many investment schemes allow you to escape the income tax legally and in turn generate handsome returns for the future. Let’s try to understand with some examples to save income tax with investment in EPF and PPF.

Save income tax with PPF

Public Provident Fund (PPF) is an investment cum tax saving fund with a maximum allowed investment of ₹ 1.5 lakh per year and a lock-in period of 15 years. Though this lock-in period might be a turn-off you can have tax exemption up to ₹ 1.5 lakh each year through PPF under Section 80 C of Income Tax Act, 1961. Meaning if you earn 10 lakhs (after exempting ₹ 2.5 lakh) in a year and invest 1.5 lakh in PPF you become eligible to pay taxes calculated on the amount of ₹ 6 lakhs. Also, you don’t have to pay any taxes on the final amount you receive at the time of maturity.


NOTE: These benefits can only be availed if you’re paying taxes on the old regime.

EPF vs PPF: Which is better and where should you invest your money?

Below is a detailed example for your reference.

Parameter

With Deductions

Without Deductions

Income

7 lakhs

7 lakhs

Deductions u/s 80C

1.5 lakhs

-

Taxable amount

5.5 lakh

7 lakhs

Exempted amount

2.5 lakh

2.5 lakh

Tax on ₹ 2.5 lakh

0

0

Tax on ₹ 2.5 lakh to ₹ 5 lakh @ 5%

12,500

12,500

Tax on ₹ 5 lakh to ₹ 7.5 lakh @ 20%

10,000

40,000

Cess (@4%)

900

2,100

Income Tax

23,400

54,600

You can easily observe from the table above that you can save ₹ 31,200 of your income tax through PPF.

Save income tax with EPF

Employee Provident Fund (EPF) is a retirement benefits scheme for employees to accumulate funds for their retirement. Under the EPF the employer deducts 12% of the basic pay and dearness allowance (DA) and contributes an equal amount into the EPF. Though it offers great leverage of tax exemption to the investors the amount received at the time of retirement is bound to be taxable under the head ‘Income from other sources.’ But to save income tax with EPF you should withdraw funds under the conditions when no TDS (Tax Deducted at Source) is deducted.

They are:

  • When contribution by the employer is less than or equal to 12%
  • When the amount is withdrawn before 5 years of service and is less than ₹ 50,000 (if income does not fall under taxable bracket)
  • When the amount withdrawn is more than ₹ 50,000 and before 5 years of service (if Form 15G/15H is furnished)

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  • When the amount is withdrawn after 5 years of continuous service
  • When the amount transferred from one account to another upon change of the employer
  • When the contract of employment is terminated due to ill health condition of the employee
  • When the contract of employment is terminated before 5 years due to discontinuation of the employer’s business

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