Voluntary Provident Fund is a voluntary contribution made by the employee towards Employee Provident Account. Here’s all you need to know about VPF scheme and the reasons that make it a good investment option.
If you are a salaried individual and invest in Public Provident Fund (PPF), you may be missing on something whose returns beat that of PPF and provides similar benefits. Provident fund (PF) is a type of retirement scheme where both employee and employer contribute towards the PF account of the employee.
Voluntary Provident Fund
Voluntary Provident Fund (VPF) is a variation of regular PF scheme under which you can contribute a maximum of 100% of the basic salary plus DA (Dearness allowance) every month. This contribution should ideally be above the regular PF limit of 12%. However, you are not bound to contribute any specific amount towards your VPF account. Your 12% PF contribution is added to the fund account along with the voluntary contribution amount.
Eligibility criteria of Voluntary Provident Fund
All members of EPFO (Employee Provident Fund Organisation) who contribute actively towards EPF every month, are eligible for VPF. A member cannot contribute to the VPF scheme when he/she is out of the job.
You can opt out the scheme only after completion of five years and when you switch your job, you can transfer your PF account. However, the VPF remains active in the new organisation as well unless you withdraw from the scheme after five years.
Benefits of Voluntary Provident Fund
Following are some of the key benefits offered by the VPF scheme.
Long-term investment tool along with safety: Voluntary Provident Fund is the safest scheme as the Government of India manages it. Being one of the most popular and trustworthy options with no investment risk, VPF has proven reliable as a long-term investment plan.
Tax saver: While accounting for taxation, your contributions made towards the VPF scheme are entitled to a tax deduction. The investment made up to Rs. 1.5 lakh is eligible to receive tax deduction under Section 80C of the Income Tax Act, 1961. The interest income is also exempted from tax until the interest rate offered does not exceed 9.5%.
Easy to invest regularly: Investing in VPF is quite easy as you don't have to visit the post office every now and then. With easy access to Voluntary Provident Fund scheme online, you can invest money effortlessly on a regular basis. You can keep investing in your current VPF scheme until you decide to change your organisation. You don't have to worry after changing your organisation as your PF account can simply be transferred with the help of UAN.
Easy withdrawals: VPF allows partial withdrawal of funds; however, the scheme comes with a lock-in period of five years. It is important to note that if you withdraw fund from your VPF account, the maturity amount becomes taxable. If you retire or resign from your job without joining another organisation, you can get your maturity amount. However, on the unfortunate event of your death, the nominee is eligible to receive the accumulated amount in your VPF account. You can withdraw money from your Voluntary Provident Fund account if there is an emergency. You can utilise the withdrawal amount for the higher education of your child, medical expenses for yourself and the family.
Higher rate of return: You can expect better returns under the VPF scheme since the interest rate offered is high, and the Government of India regulates it. The interest rates offered under the VPF scheme are revised every year and are generally higher than that of PPF.
Withdrawal facility under the Voluntary Provident Fund
There may be a number of reasons behind making a withdrawal from your VPF account. Withdrawals can be made by filing Form 31 and writing a request letter. You can get Form 31 from finance or HR team of your organisation, or it can be downloaded from EFPO official website. Also, you need to submit relevant documents including your basic information, EPF account number, postal address and bank account details.
How Is Voluntary Provident Fund calculated?
It is wise to calculate the returns and maturity value beforehand when investing in the long-term saving scheme. You can use an online calculator to arrive at the interest and maturity amount and make an informed decision about investing money. You can consider the factors given below to calculate VPF value.
- Percentage of the contribution made towards VPF
- Rate of interest
- Present EPF account balance
- Basic salary per month
- Monthly contribution towards EPF account
Tax benefits under the Voluntary Provident Fund
- You can claim tax exemption under Section 80C of the Income Tax Act, 1961.
- VPF scheme comes under Exempt, Exempt, Exempt category. You get tax exemption on the principal (contribution) amount, interest earned, and the amount received at the time of withdrawal.
- There is a tax on the interest income until the interest rate does not exceed 9.5%. If the interest rate increases further, tax is levied on the excess interest income.
- It is to be noted that the contribution made towards the VPF scheme is part of your pre-tax income.
- If the withdrawals are made before the completion of five years, the amount withdrawn is taxable if it exceeds Rs. 50,000.
- The final VPF amount on maturity is tax-free.
Simply put, Voluntary Provident Fund scheme is an extended version of Employee provident Scheme. The scheme is available only for salaried people receiving a monthly income in the form of salary. Needless to say, VPF provides employees with unmatched return rates and tax efficiency. It is not only a safe investment option, but also offers salaried class a medium-term saving option which can be liquidated smoothly in case of financial emergencies. The unmatched benefits offered by VPF has made it a popular choice in India amongst the employed class.
Recommended Read: Right Way to Invest in the National Pension Scheme