Finance

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

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

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one of friend wanted to start on his own, he had a big trouble in getting his PF money from his previous employments withdrawn.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