Thread by @fundoo_investor

#EPF tax rules understanding

Employee contributions above 2.5L in FY will be taxed on the "interest earned"

EPF rate FY22 - 8.1%

For example, you have made a 5L total contribution to EPF (Only employee contribution counts here and employers!)

5-2.5L = 2.5L additional contribution

Let's say in you're in a 30% tax bracket
EPF rate is 8.1%

2.5L*8.1% = 20250 interest earned

20250*30% = 6075 pay tax

#EPF

20250-6075 = 14175 post tax return

That means the actual return is 5.6%, not 8.1%

What we need to understand is in the next FY, your principal and interest still get 8.1% interest and that's not taxed!!!!

2.5L+14175 = 264175
264175 * 8.1% = 21398 interest earned

IMO, make use of EPF and PPF for debt instruments as part of the overall portfolio allocation strategy

Why?
> Trust
> Risk-free
> Tax free returns
> Decent interest rate (7.1 to 8.1%)
> Best suited for retirement

#epf #ppf #vpf

correction: Only employee contribution counts here and **not** employers!)

For example:
2.5L Employee contribution
2.5L Your company contribution
2.5L additional Employee contribution made under vpf

Employee contribution: 2.5L+2.5L = 5L