Tip Tuesdays: Why You Shouldn’t Opt for a Decrease in Your Employee Provident Fund Contributions in Lieu of an Increase in Your Take Home Pay

by Vinaya HS on February 16, 2010

in Finance

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One of the suggestions that came up during an office discussion about the effects of the recent circular issued by the Central Board for Direct Taxes (CBDT) was:

Employees whose basic salary is greater than INR 6,500 per month can opt to receive an employee provident fund amount limited to 12% of INR 6,500 i.e. INR 780 per month. This would increase the take home pay for such employees.

Though this suggestions looks attractive at first sight, there are several drawbacks.

  • You loose your employer’s matching contribution. If your basic salary is a significant amount, you stand to loose a significant amount of free money.
  • You loose the income tax exemption benefits that you would have otherwise gained with a higher employee provident fund contribution. In other words, your take home pay doesn’t really increase as much as you expect it to.
  • You loose the benefit of automatic savings — each month.

Unless you desperately need the few — if any — extra rupees each month, it’s always a bad idea to opt for a decrease in your EPF contributions in lieu of a [hypothetical] increase in your take home pay. And remember, the truth always lies in the calculations.

What do you think?

Tip Tuesdays is my initiative to share practical personal finance tips — every Tuesday. I’d be delighted if you could share a tip or two from your own experiences. Drop a comment to submit your tip. And, as always, do spread the word if you find this useful.




Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 1 comment… read it below or add one }

Anbusivam February 16, 2010 at 2:55 PM

Hi Vinaya,

But, it’s always a problem to get back the money from Government PF office in need. When one of friend wanted to start on his own, he had a big trouble in getting his PF money from his previous employments withdrawn. In fact it was a nightmarish experience for him at Govt PF office.

Thanks,
Anbusivam

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