Budget 2025: EPF and NPS – Big Tax Savings for Salaried Individuals

Finance Minister Nirmala Sitharaman has introduced tax benefits in Budget 2025, bringing relief to the middle class. The rebate limit under the New Tax Regime (NTR) has been increased from ₹7 lakh to ₹12 lakh, along with revised tax slabs that benefit higher-income earners. Now, individuals earning up to ₹12 lakh annually will not have to pay any tax after factoring in the Standard Deduction of ₹75,000 and the revised tax rebate of ₹60,000.

However, to maximise tax savings, employees must continue investing in the Employees’ Provident Fund (EPF) and National Pension System (NPS). Here’s how these schemes help reduce tax liability:

National Pension System (NPS)

Salaried individuals can earn up to ₹13.7 lakh tax-free per year—higher than the ₹12 lakh limit for others—thanks to NPS benefits. The key change in Budget 2025 is the increase in tax deduction under Section 80CCD(2). Employees can now claim a deduction of up to 14% of their basic salary on NPS contributions, up from 10% in the Old Tax Regime.

For example, an individual earning ₹13.7 lakh annually with a basic salary of ₹6.85 lakh can invest 14% of their basic pay in NPS, amounting to ₹95,900. Along with the standard deduction of ₹75,000, their taxable income becomes zero.

This benefit, however, applies only if the employer includes NPS in the salary package. Employees cannot choose this deduction separately.

Additional Benefits of NPS:

• Flexible asset allocation and fund switching without tax implications.
• The lowest fund management fees are 0.09% per year, compared to 1-1.5% for mutual funds.
• Historically, NPS funds have outperformed mutual funds in the same category.

Employees’ Provident Fund (EPF)

For salaried employees, EPF is a great way to save for retirement, provided they do not withdraw funds prematurely when switching jobs. Those with a basic salary of ₹15,000 or more have the option to not enroll in EPF when joining a company. However, once enrolled, opting out is not allowed during employment.

Key Benefits of EPF:

• Guaranteed returns with an attractive 8.25% interest rate.
• Employees can voluntarily contribute more through the Voluntary Provident Fund (VPF), earning the same interest rate.
• EPF withdrawals after retirement remain tax-free.

EPF and Taxation Under the New Tax Regime

While EPF is partially EEE (Exempt-Exempt-Exempt) under the new regime, employee contributions no longer qualify for tax deductions. However, the following tax benefits still apply:

• Employer contributions up to 12% of salary remain tax-free.
• The combined employer contribution to PF and NPS is tax-free, up to ₹7.5 lakh per year.
• Returns on employee contributions beyond ₹2.5 lakh per year are taxable.

By strategically investing in NPS and EPF, salaried individuals can reduce tax liability while building a strong retirement corpus.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing.