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If you think Employees’ Provident Fund, or EPF, multiplies relatively small contributions into a sizeable corpus for your retirement, then you should also know about Voluntary Provident Fund or VPF.
Who Can Invest in Voluntary Provident Fund?
A VPF is an extension of the EPF. The VPF option is available only to salaried individuals who receive their monthly payments through a specific salary account.
Benefits of Voluntary Provident Fund
The VPF falls under the EEE category ( EEE – exempt on contribution; exempt from the principal; exempt on interest) making it an excellent tax saving option. It also helps the employee amass a sizeable savings portfolio and help him/her during big life milestones.
However, Budget 2021 has placed limitations on the EEE exemption category. From FY 2021-22 onwards, tax exemption on accrued interest will be applicable only up to Rs 250,000 contribution. Interest on excess contribution will be taxable, and TDS will be deduction on such amount.
Other benefits are
Safe Investment Option:
The scheme is managed by the Government of India and has a fixed interest accrual. Hence, it is considered as a risk-free investment compared to the long-term investments offered by other private players.
Easy to Apply:
To open a VPF account, an employee must approach his HR/Finance team and advise them to raise a request for an additional contribution to the VPF through a registration form. The existing EPF account will serve as the additional VPF account.
High returns:
Currently, interest is accrued at 8.15% per annum under this scheme. Contributions up to 1.5 lakhs p.a. can be claimed as a deduction under Section 80C, and interest accrued on contributions up to Rs 2.5 lakhs is exempt from tax, resulting in higher returns in long-term.
Easy transfer:
The account can be transferred from one employer to another upon changing jobs.
How to Open a VPF Account?
An employee must ask his/her employer or the HR department in writing to open a VPF account and deduct an additional amount from salary for VPF. The employee must provide personal information and the amount to be contributed monthly from the basic salary towards the VPF account.
A VPF account can be opened at any time during the financial year. Please note that an employee cannot discontinue the investment under VPF during the financial year. In case the employee withdraws the VPF amount within five years of opening the account, the amount will be taxable.
VPF Interest Rate
The Indian government sets the VPF interest rate, which is revised yearly. The VPF interest rate for 2023-24 is 8.25% p.a.
VPF Tax Benefits
VPF is one of the best options in India to save tax. Under Section 80C of the Income Tax Act, 1961, employees can claim tax benefits of up to Rs.1.5 lakh on VPF contributions. The interest on VPF is also exempt from tax subject to the threshold limit of Rs 2,50,000 in contribution. The maturity proceeds of VPF are tax-exempt when withdrawn after five years of opening the VPF account.
VPF Tax Exemption
The VPF falls under the EEE (Exempt Exempt Exempt) category. Thus, the VPF contribution, interest and principal/maturity amount are tax-free. However, if the VPF amount is withdrawn within five years of investing, they will be liable to tax. The withdrawal amount is tax-free only when it is withdrawn after five years of investment.
VPF Contribution Limit
There is no maximum or minimum VPF contribution limit per year. An individual can also contribute 100% of his/her monthly income (salary + dearness allowance) towards VPF. The employer is not obligated to contribute to the VPF account. Also, once the VPF account is opened, it cannot be closed for five years. The contributions cannot be discontinued before five years of account opening.
VPF Withdrawal Rules
The fund allows partial withdrawals as loans with also the possibility of complete withdrawals. If the withdrawal happens before the 5-year minimum tenure, then tax will be applicable on the accumulated maturity amount. Once the employee resigns or retires from the employment, the final maturity amount is paid to him. At the time of the untimely death of the account holder, the nominee can get possession of the accumulated funds in the VPF account.
The VPF fund is mainly popular as the accumulated money can be withdrawn at any given time. In case of an unforeseen financial emergency, one can always fall back to his VPF account. The account can be broken for many reasons, which includes :
For medical emergencies of the employee or family
For marriage or higher education of the employee
For buying a new land/house or construction of the house
For education expenses of children
VPF Lock-in Period
The lock-in period of a VPF account is five years. If an employee withdraws an amount from EPF before five years, it will be liable to tax, and such amount will be taxable as income from salary, TDS u/s 192A will also be deducted on such transaction. (Picture Credit: depositphotos)
The Employees’ Provident Fund, or EPF, is one of the social security schemes that all employees of the Indian organised sector hold dear to his/her heart. For, it combines the highest interest rate in a guaranteed-return environment with the highest degree of safety of capital that one can think of. Add to that income tax benefits, and you have got a sheer winning recipe.
If you value EPF, there is no treason why you would turn your back to Voluntary Provident Fund, or VPF. It is a voluntary contribution from an employee to his/her EPF account which goes beyond the statutory requirement but offers the same benefits that are the USP of EPF. Also note that a VFP calculator online will help you to calculate the amount you can amass in a VPF account.
Is VPF a good investment?
The VPF is as good an investment as EPF. It carries an interest rate that is the same as EPF. The EPFO (Employee Provident Fund Organisation) announced the interest rate applicable to the accumulation in the EPF account. The same rate is applicable to the amount in VPF account too. For example, the EPFO declared the interest rate applicable to the EPF account for FY24 at 8.25%. It automatically becomes applicable to the outstanding amount in the VFP account too. Moreover, it carries the highest degree of safety of capital. Furthermore, VPF contributions are free from income tax too – it belongs to the EEE (exempt-exempt-exempt) category.
Can I contribute more than Rs 1.5 lakh in VPF?
While Section 80C of the Income Tax Act caps EPF contributions to Rs 1.5 lakh each financial year, an employee can contribute up to Rs 2.5 lakh every year to the VPF account without running into additional tax burden.
However, a point to note is that if you begin contributing to a VPF account, you cannot terminate it before 5 years.
How to open a VPF account
Opening a VPF account is hassle-free. An employee needs to write to the HR or personnel department to open a VPF account. He/she should also indicate the amount that should be deducted from the salary and put into the VPF account. What is significant is that an employee can open a VPF account any day he/she wishes during a year.
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