It’s also one of the least-used tax-savers under 80C because our tax-saving focus tends to be on life insurance, ELSS, PPF, NSC and other eligible schemes.

Why EPFO is the best tax saver youre probably not using
Money Tax Monday, March 23, 2020 - 19:04

EPFO or the Employees’ Provident Fund Organisation covers EPF (Employee Provident Fund) contributions made by companies’ part of the organisation, towards employees’ retirement. Interest is earned annually and is exempt from tax. Under Section 80C of the Income Tax Act, 1961, you can save tax up to Rs.1.5 lakh every financial year through contributions made to this scheme. It has remained one of the best ways to save for the long-term without taking risks. It’s also one of the least-used tax-savers under 80C because our tax-saving focus tends to be on life insurance, ELSS, PPF, NSC and other eligible schemes. 

How Does EPF Work?

Salaried employees of companies covered under the EPF Act qualify for tax deductions under Section 80C on their EPF Contributions. This contribution is mandatory for all companies covered under the Act. According to the rules of the Act, up to 12% of an employee’s Basic Salary plus Dearness Allowance (DA) every month will go towards their EPF contribution. For women employees who are on their first employment, the contribution will be 8% (as per Budget 2018). 

EPF includes employees’ contribution and a matching contribution from the employer. 

Earning Interest on EPF Contributions

The interest rate on EPF contributions are fixed every year by the EPFO in conjunction with the government. This interest earned is exempt from tax. The interest rate for FY19-20 is 8.65%. For FY 20-21, it has been revised downward to 8.50%. The assured returns and capital safety makes EPF investing one of the best ways to save and invest for the long-term, especially for conservative investors looking to avoid the volatility of stock markets. In fact, it would make sense for those investors to increase their voluntary contributions to the scheme in order to exploit its rewards more. You can track your progress by keeping an eye on your EPF passbook online

Making Additional Contributions To EPF

The contribution from your EPF may not be enough to avail the full benefit under Section 80C (up to Rs.1.5 lakh). If you are a salaried employee under EPF, you can make voluntary contributions towards your retirement in the form of VPF (Voluntary Provident Fund). You can invest up to 100% of your basic salary plus DA towards VPF. The interest rate for 2019-20 is 8.65%.

You have to decide the fixed amount you wish to invest, and the deductions will be done automatically. You will have to submit a form to your employer, based on which deductions will be made every month. The tenure will remain the same as your EPF (until you resign or retire).

How To Make Contributions If You’re Not Covered Under EPF

If you’re not a salaried person covered under EPF, you can make contributions under PPF (Public Provident Fund). Salaried employees (eligible for EPF), self-employed persons, and even homemakers are eligible to make PPF contributions. The minimum contribution is just Rs 500 per year. Interest will be calculated monthly and credited yearly. The interest rate for PPF for the January-March 2020 quarter is 7.9%. You can invest in a PPF at your bank or through internet banking or even your Post Office. The tenure will be 15 years.

Why Consider VPF or PPF?

Both these investments are what are known as EEE or exempt-exempt-exempt. This means that the amount invested, the interest earned, and the maturity proceeds are ALL exempt from tax. Which means that the 8.65% advertised on EPF is your actual rate of return, whereas an investment in an 8.65% FD if you were in the 30% slab would yield only 6.05% after taxes. 

Returns and Risks

If you’re a salaried employee, then you’re eligible for VPF and PPF. So, which one should you choose? Looking at this from a returns perspective – VPF is a better option due to higher returns. When it comes to risk, the greatest risk is liquidity. As the primary purpose of these funds is meant for your retirement, premature withdrawals come with certain rules. 

Liquidity and Withdrawal Norms

You can withdraw your EPF partially or completely under certain circumstances. When you retire, you will get the complete EPF amount plus maturity. However, you can also make premature withdrawals under specific circumstances:

Unemployment: You can withdraw 75% of your EPF amount after 1 month of unemployment and the remaining 25% after 2 months of unemployment. This amount will be tax-free if you’ve had continuous employment for at least 5 years. You will need attestation from a gazetted officer for this.

Other circumstances: You can make partial withdrawals for marriage, education, land purchase, and home loan, among others. The amount you can withdraw for these purposes will be restricted.

With VPF, if you withdraw after 5 years, no tax will apply. You can make a partial or complete withdrawal of your VPF anytime. 

With PPF, you can withdraw up to 50% after completing 5 years. One partial withdrawal is permitted every fiscal year. The withdrawals are tax-free. Full withdrawal is only possible at the end of the tenure. 

Differences Between EPF, VPF, and PPF






Covered under EFPO

Covered under EFPO


Type of contribution




Investment amount

12% of basic salary + DA 

100% of basic salary + DA beyond the 12% + DA under EPF

Rs.500 to Rs.1.5 lakh

Interest Rate





Earned yearly

Earned yearly

Earned monthly but credited yearly


Amount deducted from salary

Amount deducted from salary

ECS mandate – automatic deduction from bank account



Same as EPF

15 years + additional tenures in blocks of 5 years


Full before tenure

Full before tenure

Partial after 5 years; Full after tenure completion

Tax Exemption

Up to 12% under Section 80C

EEE under Section 80C

EEE under Section 80C

Tax Exemption: Old Vs New Regime

In the old tax regime, an employer’s contribution up to 12% towards the employee’s EPF account is tax free. Contributions exceeding 12% will be taxed to the employee. The new tax regime will also follow this procedure. You cannot claim a tax rebate on your employer’s contribution towards your EPF in either the new or the old tax regime. VPF and EPF remain completely tax-exempt under both regimes.

The writer is CEO,, India’s leading online marketplace for loans, credit cards, credit trackers, and more. 

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