Budget 2025: EPF, NPS game-changers for salaried taxpayers to save extra taxes

Tax savings tools: Finance Minister Nirmala Sitharaman announced several changes that brought cheer to the middle class. From raising the limit of rebate from Rs 7 lakh to Rs 12 lakh under the New Tax Regime (NTR), FM Sitharaman tweaked the tax slabs in a manner that would benefit taxpayers in higher salary brackets as well, effectively leaving more money in their hands. She announced that individuals earning up to Rs 12 lakh per annum will not have to pay any tax after adjusting the Standard Deduction of Rs 75,000 and the revised tax rebate of Rs 60,000. 

But there is a catch. Individuals must continue to invest in the Employees’ Provident Fund (EPF) and National Pension System (NPS) to get more tax savings. See how: 

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National Pension System 

As a salaried individual, you have the opportunity to enjoy a tax-free annual income of up to Rs 13.70 lakh, which is higher than the Rs 12 lakh limit for others. This is made possible by the Rs 75,000 standard deduction and investments made in the National Pension System (NPS). The NPS offers significant tax savings advantages under the New Tax Regime compared to the Old Tax Regime.

With the introduction of Section 80CCD(2) in the Union Budget 2024, employees are now able to deduct up to 14% of their basic salary when investing in NPS. This represents a noteworthy increase from the previous 10% deduction allowed under the Old Tax Regime.

By investing in the National Pension System (NPS), individuals earning an annual income of Rs 13.7 lakh have the potential to lessen their tax liability by up to Rs 96,000. It is crucial to recognize that this tax-saving advantage is exclusively available if the employer incorporates NPS in their cost to company package. Employees do not have the autonomy to separately choose this tax-saving avenue.

Based on an annual salary of Rs 13.7 lakh, with 50% allocated to basic pay at Rs 6.85 lakh, the NPS contribution at 14% would amount to Rs 95,900. Taking into account the standard deduction of Rs 75,000, the total income of Rs 13.7 lakh would not be subjected to tax.

NPS provides numerous benefits for investors. They have the flexibility to select their asset allocation, switch between funds, and switch pension fund managers without incurring any tax consequences. Additionally, NPS boasts the lowest fund management fees in the industry at 0.09% per year, compared to the 1-1.5% typically charged by the least expensive mutual funds. As a result, NPS funds have consistently outperformed mutual funds within the same category.

Employee Provident Fund

For the majority of salaried individuals, the Employee Provident Fund (EPF) offers an excellent opportunity to build retirement savings, as long as the individual does not prematurely withdraw the funds when changing jobs. While EPF contributions are mandatory for those with a basic pay of 15,000, it is optional for higher earners. With an attractive interest rate of 8.25%, EPF provides one of the best returns among debt-related investment options. 

Many individuals choose to make additional voluntary contributions to their EPF account, in addition to the mandated 12% of the employees' share. The Voluntary Provident Fund (VPF) also offers the same interest rate as EPF. However, any returns earned from employees' contributions exceeding 2.5 lakh are subject to taxation. It is worth noting that the returns upon withdrawal from EPF are exempt from taxation.

One should remember that under the New Tax Regime, the EPF remains partially EEE, with exemptions for employer contributions, interest earned, and withdrawals (subject to thresholds). However, employee contributions to PF are no longer tax deductible.

Under the new regime, you are not eligible to claim a deduction for your contribution to EPF. However, your employer's contribution up to 12% of your salary remains exempt from tax, subject to the overall limit of rs 7.5 lakh per year for contributions to PF and NPS. 

If your salary upon joining exceeded Rs 15,000, you had the option to not enroll in PF. Once you have opted for PF, however, you are not able to opt out during your period of employment.