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.
One thought on “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”
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one of friend wanted to start on his own, he had a big trouble in getting his PF money from his previous employments withdrawn.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