Voluntary Provident Fund: A scheme specifically made for salaried employees that help you plan your future and your post-retirement days. Find the difference between EPF, VPF, PPF and the benefits of VPF
In case you want to add to your provident fund, we recommend a Voluntary Provident Fund. Here’s all you need to know.
The Voluntary Provident Fund (VPF) is a scheme specifically made for salaried employees who want to add to their provident fund. The VPF is an extension of the Employee’s Provident Fund (EPF) and is a great tax-saving option. It is also a scheme that helps you plan your future and your post-retirement days.
Basically, VPF is a voluntary contribution that you make towards your provident fund account, over and above the EPF contribution. The EPF account requires you to save 12 per cent of your basic salary and dearness allowance. With the VPF, you can choose to increase the contribution to up to 100 per cent. All you have to do is ask your HR team, or accounting team raise a request for the addition of a VPF account. The new VPF account gets attached to the existing EPF account and can be transferred in case you change your job.
Investments into this scheme can be made for a minimum of five years. If the funds are withdrawn before five years, taxes will apply. Therefore, it is advisable to withdraw or discontinue the account after a period of five years. It usually has the same lock-in period as the EPF, which is retirement or resignation whichever is earlier. The rate of interest accrued on the deposits is reviewed by the government year and revised frequently. At present, VPF has the same rate of interest as EPF. It is the highest among the government-sponsored schemes as of March 1, 2019, the rate of interest on deposits in EPF and VPF is 8.65 per cent per annum.
Returns are high, and risks are considerably low in the VPF. Investment in EPF and VPF accounts accrues higher returns than that the Public Provident Fund (PPF), which invites an interest of 8 per cent.
One of the most important features of the VPF scheme is that it attracts tax exemptions. Investments up to Rs1.5 lakh into VPF account will be exempt from tax deductions under section 80(C) of Income Tax Act.
Difference between EPF, VPF, PPF
All kinds of provident funds are retirement plans for salaried employees who want to secure their future by saving a part of their income. The Employee Provident Fund (EPF), the Voluntary Provident Fund (VPF) and the Public Provident Fund (PPF) are long-term investment plans and help secure future of the investor.
While all the three provident funds achieve the same goal, the features of each of these schemes are different. They have different eligibility criteria, maturity and rates of interest. The EPF and VPF are meant for salaried employees who set aside a part of their income every month. On the other hand PPF is available to all Indian nationals, including those working in unorganised sectors. While the EPF is mandatory for employees working in a company with over 20 employees, the VPF and PPF are voluntary schemes.Here’s a quick look at the difference between EPF, VPF and PPF:
|Eligibility||Salaried employees||Salaried employees||Any Indian|
|Minimum term of investment||5 years||5 years||15 years|
|Maturity||Upon retirement or resignation, whichever is earlier||Upon retirement or resignation, whichever is earlier||15 years|
|Rate of Interest (per annum)||8.65 per cent||8.65 per cent||8 per cent|
|Tax benefit||Exempt for investments up to Rs1.5 lakh||Exempt for investments up to Rs1.5 lakh||Exempt for investments up to Rs1.5 lakh|
|Partial withdrawal||Available||Available||Half of deposit from seventh year|
Features of VPF
The Voluntary Provident Fund is an attachment to your existing EPF portfolio, wherein you can choose to save over and above the mandatory EPF savings. Unlike the EPF, it is a completely voluntary investment.
The government of India has made it mandatory for salaried employees to save 12 per cent of their basic salary and their dearness allowance in the Employee Provident Fund. The government also offers salaried employees the chance to save more than this 12 per cent under the VPF scheme.
Under the VPF scheme, the government allows investors to save up to 100 per cent of their basic salary and their dearness allowance, over and above their EPF accounts. This is done by attaching a VPF account to the existing EPF account. The investor can decide what percentage of his/ her basic and DA is to be saved and invested in the VPF.
An investment in the VPF has to be made for at least five years. The maximum tenure of the VPF depends on the investor’s retirement or resignation, whichever is earlier. However, much like the EPF, a VPF account can be transferred from one employer to another.
An investment in the VPF invites a rate of interest that is equal to that in case of EPF. The rate if reviewed every year and changes frequently. The current rate of interest is 8.65 per cent per annum.
One of the highlights of the VPF is that it provides tax benefit to investments up to Rs1.5 lakh. Deposits below this amount will be eligible for tax deductions, according to section 80 (C) of the IT Act.
Benefits of Voluntary Provident Fund
Investments in the VPF are usually made with long-term financial goals in mind, primarily retirement. The scheme not only helps salaried employees save some money for their retirement days but also lets you earn interest while making these savings.
The advantage of VPF is that it is voluntary and you can decide the extent of income that goes into savings. Since it is an additional investment over and above the EPF, the investment is for a longer duration. Which means it may not be for you immediate exigencies but will get you covered after retirement. There are options to partially withdraw money from your VPF account, so that money can help you pay for other financial goals such as a house or fund your child’s education.
The interest rates are competitive and among the highest of the government-sponsored schemes. The interest rate is decided by the union ministry of labour and employment based on recommendations from the Central Board of Trustees. Which means an investment in this scheme is relatively safe from market fluctuations. The interest earned on VPF funds is also tax-free.
The other big advantage of the scheme is the tax benefit it offers. Investments into your VPF are eligible for tax deductions if the deposit amount is less than Rs1.5 lakh. Accounts can be transferred from one employer to another when you change jobs.
Opening a VPF account is a no-fuss deal. All you have to do is ask your HR or accounting team to raise a request for an account and specify the percentage of your basic and DA you want to save. Tax benefits will be automatically calculated in your Form 16 at the end of the year.
How VPF works
VPF works as a savings kitty for salaried employees who save a certain percentage of their basic salary and dearness allowance. To create a VPF account, you can write to your HR or accounting team. They will raise a request and a VPF account will be attached to your EPF account. You can choose to save up to 100 per cent of your basic salary and DA.
In the case of EPF, it is mandatory for employees to save 12 per cent of their basic salary and dearness allowance. An equal amount is contributed to the EPF by the employer. However, unlike EPF, the employer is not obligated to match up your percentage and contribute to your VPF contribution.
Once a VPF account is created, amounts cannot be discontinued mid-year. If any amount is withdrawn from the VPF within the first five years, the interest becomes taxable. It is advisable that investments are made for a minimum of five years. The maximum lock-in period is the same as that of EPF—retirement or resignation, whichever is earlier.
Since the funds collected in the VPF account are deducted directly from the salary, the investor does not have to worry about investing funds on his/ her own. The funds gathered in the VPF will also earn interest. Since the interest is tax-free, it creates a tax-free kitty for the investor. However, investors should also know that the rate of interest fluctuates and there is a risk of rates falling. The rates are reviewed by the union ministry of labour and employment every year.
Assuming that you are currently 25 years old and will retire at 60, let us calculate the amount you will receive when you retire. To make matters simple, let us assume that the sum of your basic salary and dearness allowance is Rs 10,000 a month. In your EPF, you will save 12 per cent of this Rs10,000 every month. Your employer will also contribute 12 per cent to your EPF. Now, over and above this 12 per cent, you have decided to save an additional 13 per cent of your income in VPF. So you will be saving 25 per cent of your basic salary every month.
The amount or deposit is calculated as 25 per cent of Rs 10,000, which is Rs 2,500. Your employer will contribute 12 per cent, which is Rs 1,200. Your total balance (EPF + VPF) is now Rs 3,700. On this, you will receive an interest of 8.65 per cent (the current rate of interest). Assuming that your salary increases by 8 per cent annually, on average, you would have accumulated Rs 22,976,425. This will vary if the rate of interest changes.
Tax benefits of a VPF account
Provident Funds are the ideal investment options for salaried employees as these schemes not only help save money but also offer tax benefits. Much like the EPF, the VPF, too, provides tax relief to the investor.
Investments into the VPF are eligible for a full tax deduction under section 80(C) of the IT Act. This means that similar to PPF and EPF, investment into the VPF comes under the category of highest tax deductions. The investment or deposit amount (up to Rs1.5 lakh) is tax-free, the interest earned is tax-free as well as the entire corpus is tax-free, at the time of withdrawal.
So if your VPF contribution is less than Rs1.5 lakh a year, you are eligible for a tax deduction. The interest you earn will not be taxed. At the time of retirement, when you withdraw the entire corpus accumulated in your account, it will not be taxed either.
Only if withdrawals, partial or full, are made before five years of creating a VPF, the amount withdrawn will be taxed. Withdrawals are tax-free only after one has completed five years of service.
How to open a VPF account
Opening a VPF account is not as complicated as other savings schemes, where the investor has to go to a post office or a bank. A VPF account can be opened by the investor at his or her workplace.
The investor has to write to the HR or accounting team in his/ her office, requesting them to open a VPF account. The investor must also tell the HR/ accounting team what percentage of their basic salary should be deducted and saved in the VPF. AN investor can choose to save up to 100 per cent of his/ her basic salary and dearness allowance.
Once a request is raised by the HR/ accounting team, a new VPF account will be attached to your existing EPF account. Usually, employers ask employees to make requests for VPF at the beginning of the financial year. However, rules may vary from one place to another, so make it a point to find out about the rules.
In case you leave a workplace and join somewhere else, your account will be transferred to the new workplace along with the EPF. Upon leaving a company, you can ask for your EPF and VPF numbers. When you join a new company, the accounts will be transferred using a Unique Account Number.
The withdrawal process for VPF
The VPF allows investors to withdraw their money either completely or partially at any point in time. However, the VPF has the same lock-in period as the EPF, which is when the employee resigns or retires, whichever is earlier.
Any funds withdrawn before a minimum period of five years of the opening of the account will invite tax deductions. If the funds are withdrawn after five years, no tax is applicable. Funds accumulated in the VPF can be withdrawn to take care of various immediate exigencies such as marriage, higher education of child, purchase of a house or even to pay medical bills.
To withdraw money from your account, you can either use the help of your HR/ accounting team to withdraw your corpus from the EPF and VPF account, or do so online. You can log in using your UAN number and raise a request for withdrawal. The funds will be transferred to your account directly.The maturity amount is paid to the employee at the time s/he resigns or retires. In case of pre-mature withdrawal, the fund allows partial withdrawal as loans. Full withdrawal is also allowed. In case of premature death of the investor, the nominee will be eligible to get the accumulated funds in the account.
What is the difference between an EPF and VPF?
Both the EPF and the VPF are provident funds meant for investments by salaried employees. The government of India has mandated that every salaried employee must save 12 per cent of his/ her basic salary and dearness allowance towards the Employee Provident Fund. The employer will also contribute an equal amount towards the employee’s EPF. This is a saving instrument for salaried employees where they can secure their post-retirement days and also earn interest on their savings.
The Voluntary Provident Fund or VPF allows employees to increase their savings. However, unlike the EPF, it is not mandatory and is up to the investor to choose. Under the VPF scheme, the investor can choose to increase the percentage contribution. This means that the investor can choose to invest up to 100 per cent of his/ her basic salary and dearness allowance in provident fund. This extra saving will go into the VPF, which accrues the same rate of interest as the EPF.
Both EPF and VPF provide tax benefits. Investments up to Rs1.5 lakh are eligible for deductions under the section 80 (C) of IT Act. The interest accrued on the deposit is also tax free. Any funds withdrawn from the accounts before five years will invite a tax deduction.
What is the interest rate of a VPF account?The interest rate for the Voluntary Provident Fund is same as that for EPF. The rate for both schemes is decided by the union ministry of labour and employment. The rates are reviewed every year and changed frequently. This means that there is a chance for the rate of interest to drop. However, since the rates are not dependent on the performances of the market, they are relatively safe from market fluctuations. As per the latest revision, as of March 1, 2019, the rate of interest is 8.65 per cent per annum, which is slightly higher than that of the Public Provident Fund (PPF). The existing rate of interest of a PPF is 8 per cent per annum.
What is the maturity period for a VPF account?The maturity period of a VPF is the same as that of an EPF. The amount matures once an employee retires or resigns, whichever is earlier. However, in case a person resigns and joins somewhere else, the VPF account will be transferred along with the EPF. In such a case, the employee may withdraw the corpus or choose to continue with the savings. If the corpus is withdrawn before five years of the opening of the VPF account, it will be subject to tax deductions. There will be no tax deductions on any withdrawal—partial or full—after five years. The interest accrued is also tax-free.
Who can invest in the VPF?The Voluntary Provident Fund, much like the Employee Provident Fund, is meant for salaried employees. Salaried employees save 12 per cent of their basic salary and dearness allowance in an EPF. An equal amount is contributed to the employee’s EPF by the employer. If the employee wishes to save more, he/ she can do so by investing in the VPF, which is a voluntary scheme. The employee can save up to 100 per cent of his/ her basic and DA, over and above the EPF, in the VPF.
What happens to my VPF account when I leave my job?
When a person leaves his or her job and joins at another workplace, the VPF gets transferred along with the EPF. The investor may choose to withdraw the corpus and close the account or keep investing in the VPF. If the account is over five years old, no taxes will be deducted from the withdrawn amount.In case the investor wants to continue investing, he/ she can inform the HR/ accounting team of the new employer at the time of joining. The VPF account can be transferred every time you change a job. In case you stop investing, you will continue to accrue interest on the balance available in the account.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.