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Tax Saving Investment

As the financial year approaches its end, salaried individuals rush to pick tax-saving investment options. Nevertheless, it is advisable to plan for your investments well before the financial year’s close. The Government of India offers a range of exciting tax-saving schemes for individuals. Moreover, for those who wish to invest their funds in these schemes, it is thus advisable to go through each one of them for a rewarding experience. We discuss the various tax-saving options in this article. Let's begin!

Difference Between EPF, PPF, VPF, NPS, and GPF

Point of Difference EPF PPF VPF NPS GPF
Maturity Upon retirement Upon retirement Upon retirement After 60 years Age of retirement
Interest offered As decided by the government; 8.5% for FY21 As decided by the Ministry of Finance; 7.1% for FY21 8.5% per annum In the range of 12% to 14% based on the fund’s performance 7.1%
Safety of Investment Government-backed; Safe Government-backed; Safe Government-backed; Safe Comparatively safe. Also, depends on market trends. Government-backed
Eligibility All Indian employees All Citizens of India, except NRI All Indian employees Any individual Government employees who were hired before 1 January 2004.
Contribution 12% of employee’s basic and dearness allowance by employee and employer, each Any amount between Rs.500 and Rs.1.50 Lakh > 12% of employee’s salary up to 100% Minimum Rs.6000; no maximum limit Minimum = 6% of the employee’s salary.

Maximum= 100% of employee’s salary.

Tax Benefit Tax-free up to Rs 1.50 lakh Tax-free up to Rs 1.50 lakh Tax-free up to Rs 1.50 lakh Tax-free up to Rs 1.50 lakh Tax exemption on the interest earned, contribution and return.
Withdrawal Partial withdrawal under mentioned conditions before 5 years, subject to TDS. Partial withdrawal under specific conditions after 5 or 7 years. Partial withdrawal under specific conditions before 5 years. Only 20% of the total amount before retirement. Can withdraw up to 75% of the outstanding balance in the PF or 12-month emoluments, for the reasons of education or marriage.

 

 

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Employee Provident Fund Option

Employee Provident Fund(EPF)

The most important tax-saving investment option. Governed by the Employee’s Provident Fund and Miscellaneous Act, 1952. Subsequently, the scheme requires both the employee and the employer to deposit the mentioned amounts at regular intervals. This will thus help the employee post-retirement. Subsequently, any organization that has over 20 employees needs to follow the EPF guidelines as per law.

FeaturesAdvantagesDisadvantages
Under this scheme, both the employee and employer, thus contribute 12% of basic and dearness allowance in the PF account of the employee per month.EPF thus promotes savings among the employees each month.The employee can thus withdraw their PF money only after retirement.

 

However, in case of certain emergencies such as medical illness, child marriage, house loan, etc., EPFO allows partial withdrawal.

The employee subsequently contributes 12% to their PF accounts.

 

In contrast, the employer has to contribute 8.33% to the employee’s EPS(Employee Pension Scheme) and 3.67% towards the EPF.

Employee Provident Fund Office(EPFO) offers 8.50% interest on the PF accounts.If the amount from the PF is withdrawn before maturity, it consequently becomes taxable.
The employee can thus have only one PF account for his entire life.

If he changes his company, he has to consequently transfer his PF account from his past employer to a new employer.

The interest earned on the PF account as well as the principal is subsequently tax-free.Inflation affects the real value of savings.

 

Public Provident Fund(PPF)

 

PPF is a tax-free scheme of the Government of India. Also, PPF has a high degree of safety to its being a government-backed scheme. PPF is thus a long-term investment scheme. Moreover, for individuals looking to earn high as well as stable, it is an ideal investment option. Consequently, one can avail of loans against their PPF account. However, it can only be availed from the 3rd year till the 6th year of activation. Also, it is one of the most popular sources of investment and thus a reliable tax-saving investment option.

 

Features Advantages Disadvantages
The account holder must be an Indian citizen to be eligible for thus investing in PPF.

 

They can subsequently open their account in a post office, nationalized bank, or a major private bank.

 GoI sets the interest rate on the PPF for every quarter individually.

 

Q4 FY20: 7.9%

Q4 FY21: 7.1%

 Cannot withdraw before 15 year lock-in period.
Also, PPF has a lock-in period of a minimum of 15 years. It can also be extended to another 5 years.

 

Moreover, investments have to be made into the PPF account every year.

 Investments made in the PPF are thus highly safe as the government pays interest rates at fixed times. The account holder can subsequently make only 12 deposits in one year and not more.
A minimum amount of Rs. 500 to a maximum of Rs 1.50 lakh can be invested in a PPF. Under section 80C of the I-T Act, PPF investments offer a deduction of Rs 1.50 lakh in a financial year. Partial withdrawals are thus allowed by some banks only after a certain time.

 

 

Voluntary Provident Fund(VPF)

VPF follows its name. The account holder can thus choose the amount they wish to contribute to the VPF account on a regular basis. Also known as Voluntary Retirement Fund. It is thus another form of EPF. Moreover, it is available to salaried employees who have a separate salary account. The subscriber can thus withdraw their money at any time.

Features Advantages Disadvantages
Contribution over and above 12% is mandatory by the employer. Follows EEE (Exempt on contribution; exempt from the principal; exempt on interest). Thus, a good tax-saving option. 5 year lock-in period. The amount is taxable after 5 years.
Despite not being mandatory, the employee can also contribute up to 100% of their D.A and salary in this. Interest earned on VPF is thus fixed and it is credited to the PF account only. FY20: 8.50% Only salaried individuals can access this account.

National Pension System(NPS)

Also known as National Pension Scheme. NPS invests the subscriber’s money into market-linked instruments like equity and debt of different organizations. Thus, all citizens of India can avail themselves of this facility. Moreover, it is a market-linked scheme that invests in equity and debt. Subsequently, the returns depend on the performance of the fund. Generally, the interest ranges from 12% to 14%.

Features Advantages Disadvantages
NPS is regulated by the Pension Fund Regulatory and Development Authority of India(PFRDA). NPS consequently offers flexibility to the subscriber. They can thus change the amount to be set aside and saved each year. Consequently, no fixed rate of interest as it is market-linked. However, it remains in the band of 12% to 14%.
All Indian Citizens aged between 18 to 60 years can apply. Partial withdrawal is thus allowed after 3 years of opening the account. The final amount which the subscriber gets thus depends on the fund’s performance.
NPS thus offers 4 different classes of investment viz equity, corporate bond, government bonds, and alternative assets. Subscribers can subsequently claim up to Rs 1.50 lakh benefits u/s 80C of the Income Tax Act. Funds can subsequently be withdrawn fully only after 60 years of age.

 

General Provident Fund(GPF)

It is thus only available for government employees in India. All the government employees can GPF subsequently contribute a certain portion of their salary to the account. The government thus decides the interest on the GPF from time to time. Moreover, the subscriber gets back the GPF amount on retirement. Furthermore, the subscriptions to GPF are stopped 3 months before retirement.

Features Advantages Disadvantages
Subsequently, regulated by the Department of Pension and Pensioner’s Welfare under the Ministry of Personnel, Public Grievances, and Pensions. Tax-free and great savings option for government employees. Only for Government employees, who were thus employed till 31 December 2003.
Consequently, gives an interest rate of 8% Immediate payment of the amount on retirement. Withdrawal allowed only at retirement.
The monthly contribution is required from the employee, except under suspension. 

 

Conclusion

The government of India offers a range of tax-saving investment options for employees. Moreover, these options are tax-free and one can thus claim benefits under the Income Tax act. Subsequently, the government provides a host of schemes. EPF, VPF, NPS, PPF and GPF are some of these schemes. One has to thus analyze each of these schemes and choose the one that best suits them.

Each of the schemes has a different feature such as a lock-in period, interest rate, contribution per month, etc. EPS thus requires 12% from the employee and the employer in the PF account per month and it is only for the organized sector. PPF is available for all Indian citizens and subsequently has a lock-in period of 15 years.

VPS is a voluntary tax-saving investment option and also has a lock-in period of 5 years. PFRDA regulates the NPS in India. It invests in market-linked products like equity and debt. Furthermore, such investments help you develop a savings habit. Government employees hired till 31 December 2003 can avail GPF.

Moreover, these tax-saving investment options will help you during your retirement years. It is thus wise to plan for your retirement as early as possible. Consequently, these tax-saving investment options can play a major role in planning your retirement and saving appropriately.

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