In making money, be it for business owners or salaried employees, it is essential to know about money management and the tax-saving investments which can make you more money than just bank based investments. Most people use PPF and EPF.
PPF or Public Provident Fund is one of the most popular saving schemes among Indian households managed by the Central Government. The money in the PPF account and the returns it generates are guaranteed.
Employees Provident Fund (EPF) is a retirement benefits scheme in which employees of an organization contribute a small portion of their basic pay monthly. People mostly invest in PPF especially business owners but forget the key benefits of EPF over PPF. One can expertise in money management, make a lot more money and reduce more taxes (with business owners) if the correct decision is made.
There are four types of investments in debt: liquid, short (1-3 years), medium (3-5 years) and long (over 5 years) term debt. Both PPF and EPF are long-term debt instruments because PPF is 15 years and EPF is 58 years or at retirement in both cases. PPF and EPF have certain benefits for both salaried employees and business owners, respectively.
For employees employed at an organization, reduction of PPF or EPF is mandatory. The contribution an employee makes is about 12 and a half percent on a basic salary which is equal to the business a person works. At present, the rate at which it is growing is 8 and a half per cent, which is the highest interest rate on any debt instrument backed by the government.
But the ministry of finance imposed a limit according to which if more money than 2.5 lakhs is contributed on these instruments it shall be fully taxable which results in no benefit for employees. The best workable and money management solution for business employees is not to invest only in EPF (considering long term) rather diversify into other long-term debt instruments like PPF. Second, always know how much money to be allocated in these debt instruments, in EPF as well if needed by not crossing the limit of 2.5 lakhs or else go for PPF.
Similarly, the same solution applies for business owners and they can also use PF for themselves as long as they are salaried with the business. As mentioned above, 8 and a half percent which has not currently been revised is one of the best interests possible for long-term investments ensuring the cap of 2.5 lakhs. Keeping EPF as the priority as it reduces business taxes legally, makes more profits from the business and becomes a part of the wealth portfolio and also enhances money management skills.
At last, both business owners and employees should not cross the limit of 2.5 lakhs in case any money is left in EPF, it should be out in PPF. All the money should be comparable to the goal of long-term debt amongst the four categories.
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