Employees who are making an extra contribution towards their EPF through VPF (Voluntary Provident Fund) might be in looking for other tax-saving investment options to park the extra money and save the tax at the same time. But why?
Recent Development- Tax and Rate Cut
Provident Fund Tax
Last year Central Board of Direct Taxes (CBDT) through a notification made Provident Fund (PF) contributions over Rs 2.5 lakh made by the employees (employer is also contributing) will be taxable from Financial Year 2022-23.
However, government workers who contribute to the General Provident Fund (GPF) would benefit since the PF contribution threshold limit of Rs 2,50,000 will be increased to Rs 5,00,000. GPF is a savings scheme available particularly for government employees.
PF Rate Cut
The Employees' Provident Fund Organisation (EPFO) Central's Board of Trustees cut the interest rate on PF deposits year 2021-22 to an almost four-decade low of 8.1 percent on March 12, 2022, from the previous rate of 8.5 percent.
Why choose other tax-efficient investment options?
The combined blow has rendered EPF unappealing to subscribers who earn high salaries and make huge voluntary contributions to PF in order to tax-free a significant portion of their earnings. According to the Finance Act 2021, any interest relating to the amount of PF contribution paid by workers that exceed Rs 2.5 lakh would be taxed.
Other-Tax Efficient Investment
Employees who want to save money on taxes can look at other tax-saving options. The following are a few examples of such schemes:
Public Provident Fund (PPF)
As the threshold limit applies independently to various PF schemes and not to combine contributions from different schemes, such workers can divert up to Rs 1.5 lakh to the PPF to decrease the excess contribution on EPF, CPF, or GPF on which interest is taxable.
PPF scheme is a long-term investment option that pays a competitive rate of interest and returns on investment. The interest and refunds generated are not subject to income tax. Under this scheme, one must create a PPF account, and the amount contributed during the year will be claimed as a deduction under section 80C, Income Tax Act, 1961.
Equity Linked Saving Scheme (ELSS)
Another tax-saving tool is the ELSS. ELSS is a king of Mutual Fund. This scheme has the potential to provide higher long-term tax efficiency returns. Apart from the ELSS, employees who are facing a tax cut on their surplus PF payments can also contribute to other Mutual Fund schemes for long-term investments to earn better tax-efficient returns.
Unit Linked Insurance Plans (ULIP)
ULIPs issued by insurance firms are also a suitable option for workers who are subject to tax deductions on interest on excess PF contributions due to their entire tax exemption.
ULIP is a type of insurance that combines investment and life insurance to safeguard your family financially in the event of a disaster. The amount you pay for a ULIP is split into two parts.