We all have heard about EPF or PF, which is the short form of Employees’ Provident Fund. Legislated in 1952, it is the earliest social security scheme for employees in Independent India and is designed to build a huge retirement corpus for those who earn a salary in a certain category of businesses due to teh high interest rate it offers. But do you know about VPF or Voluntary Provident Fund, a non-compulsory investment vehicle available for those who are enrolled in EPFO?
VPF is non-compulsory as opposed to EPF which is mandatory for anyone earning a basic salary of up to Rs 15,000 a month in firms that employ more than 20 people.
Though most of the working population, even those who earn far more than Rs 15,000 a month opt for PF, very few opt for VPF. The irony is, like PF, VPF attracts the same rate of interest. That means, these employees are losing out on a lot of money they could have thus earned. This money loss can be stopped by opting for the VPF.
Attraction of VPF
VPF is administered by the same organisation EPFO (Employees’ Provident Fund Organisation), is governed by the same rule and, therefore, enjoys the same degree of security that PF does.
The real cherry on the cake is the rate of interest on VPF right now is the same as PF or 8.25%. Incidentally, it is as much as 115 basis points more than 7.1% which is given by PPF or Public Provident Fund, an extremely popular government-backed long-term guaranteed return scheme.
In fact, there are hardly any guaranteed-return debt instrument that offers the same degree of protection and return as the VPF (or PF) now.
Moreover like PF and PPF, VPF, too, comes under the EEE category in income tax – contribution, principal and interest all are exempt from paying taxes. Therefore, it allows building a neat corpus in the long run along with tax efficiency.
However, there are some tax restrictions on the limits of tax efficiency. From FY22, there is tax exemption on interest only up to a contribution of Rs 2.5 lakh a year. If the annual contribution exceeds this ceiling, TDS will be applicable on it.
How much can one contribute?
While an employee has to contribute 12% from the basic + DA (dearness allowance), contributions to VPF is beyond this limit. The maximum that one can contribute is the entire amount of the basic that remains after deducting the contribution to EPF.
However, an employee must remember that his/her employer is not legally required to contribute to his/her VPF kitty too. Contributions to VPF are made only by the employee who volunteers for it. Moreover, the amount to be deducted from the salary of an employee for contribution to the VPF account is to be decided by the employee only.
This is unlike EPF where both the employee and the employer have to pay 12% of the basic + DA to the PF account every month.
Another point to keep in mind is that VPF carries a lock-in period of minimum five years, which means if one opts for it, one has to continue it for at least five years.
The arithmetic
Suppose an employee chooses to contribute Rs 10,000 from his salary to the VPF kitty and continues it for 20 years.
He comes alive to the potential of VPF at the age of 40 and continues it for 20 years, till he retires at 60.
In that case, he will make a neat sum of Rs 60.02 lakh from VPF alone assuming an interest rate of 8.1%.
If he can raise the monthly contribution to Rs 12,000, the VPF kitty at retirement sum jumps by Rs 12 lakh and touches Rs 70.02 lakh.
Now let’s assume, this employee used to be paid Rs 15,000 Basic + DA when he joined work at the age of 25. He gets a 5% annual increment and the interest rate is the same 8.1%. This will entitle him to a sum of Rs 1.07 crore from PF.
Therefore, the EPF and VPF put together will make a neat pool of Rs 1.67 crore for him. Most important, he would have saved a lot on tax payouts and slept well due to the security EPF and VPF enjoy.
A VPF account can be opened at any time of the year. All an employee has to do is to write to the company’s relevant authorities to begin the account and has to specify the amount that has to be deducted from his monthly salary.
Voluntary Provident Fund is as secure and as rewarding as the EPF run by Employees’ Provident Fund Organisation (EPFO). It is also as easy to open and maintain. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
