How to save tax with PPF, NPS, and EPF

NPS and tax benefits play a vital role in this context, allowing taxpayers to not only reduce their tax liability but also make a strong financial plan for their retirement. The most popular tax-saving instruments include the Public Provident Fund (PPF), National Pension System (NPS) and Employees’ Provident Fund (EPF). These three schemes not only help individuals build a secure retirement corpus but also offer significant tax benefits.

Understanding NPS and Tax Benefits

NPS and tax benefits play a vital role in retirement planning and saving taxes. The National Pension System (NPS) is a government-funded pension scheme that offers several tax benefits under the Income Tax Act. Here’s how you can save taxes through NPS:

1. Section 80CCD(1) Tax Deduction: Contributions to NPS qualify for a tax deduction of up to 10% of salary (salaried) or 20% of gross income (self-employed), capped at ₹1.5 lakh under Section 80C.
2. Additional deduction under section 80CCD(1B) – An additional deduction of ₹50,000 is available for contributions made to NPS, over and above the limit of ₹1.5 lakh under section 80C.
3. Section 80CCD(2) Deduction: Employer’s NPS contribution (up to 10% of basic salary + DA) is deductible under Section 80CCD(2) and is tax-exempt.
4. Tax-free growth potential benefits – At the time of retirement, 60% of the NPS corpus can be withdrawn tax-free, while 40% needs to be used to buy an annuity.

PPF and NPS tax benefits: A safe way to save tax

PPF and NPS Tax Benefits: PPF offers guaranteed returns, while NPS provides pension benefits. Together, they create a strong, tax-saving investment plan.

PPF and NPS Tax Benefits:

1. Tax deduction under Section 80C – Employee contribution (up to 12% of salary) is eligible for tax deduction under Section 80C.
2. Long term wealth creation – PPF has a lock-in period of 15 years (which can be extended in blocks of 5 years).
3. .Safe and Guaranteed Returns – Being backed by the government, PPF is a safe and stable investment option.
4. Exempt-Exempt-Exempt (EEE) Status – PPF comes in a completely tax-free category, i.e. contributions, interest earned and maturity amount are completely tax-free.

EPF: Tax-Efficient Retirement Plan

EPF is another excellent tax-saving option for salaried individuals. It is contributed by both the employer and the employee, leading to long-term wealth accumulation.

1. Tax deduction under Section 80C – Employee contribution (up to 12% of salary) is eligible for tax deduction under Section 80C
2. Employer contribution tax-free – Employer contribution (up to 12% of salary) is tax-free.
3. Interest income tax-free – Interest earned on EPF is tax-free on contributions up to ₹2.5 lakh.
4. Tax-free withdrawal after 5 years – If EPF is withdrawn after 5 years of continuous service, it is completely tax-free.

PPF, NPS or EPF: Which one to choose?

It depends on what your financial needs and risk appetite are. Here’s a quick comparison:

How to maximize tax savings from PPF, NPS, and EPF?

Follow the following strategies to avail maximum tax benefits from these schemes:

1. Invest in NPS and use Section 80CCD(1B) – If you have met the limit of ₹1.5 lakh under Section 80C, invest more than ₹50,000 in NPS.
2. Invest to get tax-free returns – PPF is the best option for long-term investment, providing completely tax-free interest income
3. Take advantage of EPF – A salaried employee should contribute continuously to EPF so that he gets a tax-free corpus at the time of retirement.
4. Use PPF and NPS tax benefit schemes properly – PPF gives security while NPS gives higher returns.

Conclusion:

PPF, NPS, and EPF are good tax-saving tools for various financial purposes. EPF is the best option for salaried individuals. By understanding NPS and tax benefits and using PPF and NPS tax benefits wisely, you can maximize your tax savings and build a strong financial future.