Why do most salaried persons love the Employees’ Provident Fund (EPF)? It offers tax-free and secure returns, deductions under section 80C and ease of investing because a small portion of your salary gets automatically deducted and goes to your EPF account. But there is a limit to how much money you can invest in the EPF.
Now, there is a way to increase this contribution. Enter Voluntary Provident Fund (VPF). The VPS allows you to invest more in your EPF account and, as the name suggests, it’s voluntary.
Understand your VPF
Presently, your employer deducts 12 percent from your basic salary every month as your contribution to the EPF. Employers also contribute 12 percent to your EPF corpus, out of which 8.33 percent (subject to maximum basic pay of Rs 15,000, or Rs 1,250) goes towards the Employees’ Pension Scheme (EPS).
This is the statutory requirement under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The monthly contributions, along with interest accumulated over the years, make up your retirement corpus.
But, over and above your 12 percent contribution, you can choose to direct more of your salary towards EPF. This additional contribution qualifies as voluntary provident fund. Your extra investment will get you the same rate announced by the EPFO every year for EPF schemes, as also the same tax benefits. Likewise, rules on withdrawal will apply too. So, not only will your contribution qualify for deduction under section 80C, the interest accumulated during the investment period will also be tax-free, as will the maturity amount. Put simply, it is an extension of your EPF scheme – tax exempt at investment, accumulation and maturity stages (EEE status).
The rate of interest usually declared by the EPFO is higher than that of several other debt instruments, besides being secure, as it is backed by the central government. “Thanks to the power of compounding, your VPF contributions can boost your retirement corpus significantly,” says Tejal Gandhi, Founder, Money Matters.
For example, let’s say your basic pay is Rs 50,000 and your EPF contribution works out to Rs 6,000 a month and you have 20 years to go before you retire. Assuming an interest rate of 8.5 percent, your retirement corpus will be Rs 67.4 lakh. However, if you add four percentage points more of your basic as your VPF contribution, your retirement corpus will be Rs 79.94 lakh. That is an increase of Rs 12.54 lakh.
How to start Voluntary Provident Fund
You can simply start contributing through your employer – many now facilitate this online. There are no KYC requirements to be fulfilled. Being voluntary in nature, VPF comes with an on-off tap. You can choose to start, stop, increase or decrease your VPF contributions every month. However, some employers provide a window to make these changes only at the beginning of the financial year. So, you need to check with your employer. If your EPF contribution is not capable of exhausting the Rs 1.5-lakh section 80C ceiling, VPF will automatically bridge the gap.
Can you withdraw from your VPF?
Ideally, you should withdraw your EPF and VPF money only at the time of retirement. Any partial withdrawal can set your retirement planning back by several years. If you must withdraw, you will be allowed to do so only for specified purposes. These include purchase or construction of your house, renovation, critical illnesses suffered by the subscriber or family members, marriage of self, siblings and children, as also children’s higher education. So, ensure that you are invest only the amount that you would not need for the foreseeable future in VPF.
Should you invest in Voluntary Provident Fund?
Yes, if your monthly cashflows permit additional investment and you wish to invest more to ensure secure retirement years. “It is one of the best debt instruments that suits conservative investors looking for safe retirement planning avenues. The interest earned on your contribution compounds over the years, resulting in a substantial retirement corpus,” says Mrin Agarwal, Founder, Finsafe.And there is an added benefit, adds Mrin. Since the money is deducted before salary credit, you will have less funds to spend, thus controlling your expenses.