It is always great to build a retirement fund while you have a regular income and park the money in avenues that give a good return on investment. There are many such options available that cater to investors with different risk profiles.
Of these, one of the most noteworthy savings plans, backed by sovereign guarantee, is the Provident Fund (PF). In India, there are primarily two categories of Provident Funds – compulsory PFs and optional PFs.
The Employees’ Provident Fund belongs to the compulsory category of PFs; whereas the Voluntary Provident Fund is an optional PF.
Voluntary Provident Fund (VPF) is a voluntary fund contribution from the employee towards his Provident Fund account. This contribution is beyond the EPF contribution. It is not a compulsory investment but is usually opted for by individuals to secure the retirement phase.
The maximum contribution in VPF is up to 100% of the basic salary and dearness allowance. Note that the interest earned on VPF is at the same rate as the EPF.
The numerous features of a Voluntary PF are discussed below –
Up to resignation/retirement
The amount depends on the employee
The amount depends on the investment
Individuals who are employed in the organised sector of the economy are eligible for a Voluntary Provident Fund. Moreover, EPF is only mandatory for organisations that employ more than 20 individuals. Therefore, one must work in an EPF-recognised organisation to have a Voluntary Provident Fund.
Organisations with less than 20 employees might also choose to open an EPF account for their employees. However, that depends on the employer and not the employee. If such an employer chooses to open EPF accounts for their employees, only then can such employees create a VPF.
Initiating a Voluntary Provident Fund is a convenient and straightforward process. Individuals can simply convey in writing their decision to contribute an extra sum of money in their EPF accounts to their organisation’s accounts or HR department. Apart from this, they need to fill out a VPF application form.
Such individuals also need to specify the amount that will be deducted from their monthly salary as a VPF contribution.
The interest rate is set by the Government and revised yearly. The current rate of interest for VPF for 2023-24 is 8.15% p.a.
Since the Voluntary Provident Fund is a subset of EPF, it earns interest at the same rate as the latter. Employees’ Provident Fund Organisation – the organisation that overlooks EPF regulations – reviews the EPF interest rate at the end of every financial year after consulting with the Finance Ministry.
For the Financial Year 2023-24, the EPF interest rate is set at 8.15%. This same percentage is also applied when calculating the interest on a Voluntary Provident Fund.
EPFO has no strict guidelines concerning the VPF contribution limit. The only default criterion is that an individual needs to contribute a portion of their salary that is in addition to the compulsory percentage fixed for EPF.
For example, if Jeetu earns Rs.30,000 per month (basic pay + dearness allowance), then his compulsory contribution as per the standard percentage would be Rs.3600 (30,000 x 12%). Therefore, if he chooses to deposit Rs.6000 per month to his EPF account, then his Voluntary Provident Fund would be Rs.2400 (6000 – 3600).
On that note, an individual can specify their allocation to be as much as 100% of their salary (basic pay + dearness allowance).
The minimum lock-in period for a Voluntary Provident Fund is 5 years. Moreover, since a VPF is maintained through an EPF account, an individual can withdraw such amount upon retirement, unemployment for more than 2 months, or to defray the following expenses –
Nevertheless, the minimum threshold to avail of all VPF tax benefits is 5 years. If an individual chooses to withdraw before 5 years of lock-in, then he/she might lose out on exemptions.
An EPF account holder can withdraw the balance in an EPF account (EPF + VPF) – when they retire or resign from their current job. Other instances when an individual can withdraw such a balance are mentioned above.
On that note, an individual can choose to make partial withdrawals from their EPF account as a loan or withdraw the entire amount. Apart from that, if an EPF account holder passes away, then his/her nominee can withdraw the entire amount in the said account.
As mentioned previously, a Voluntary Provident Fund enjoys all the benefits of EPF, including tax benefits. Contributions made to an EPF account in a specific year are exempt from taxation under Section 80C of the Income Tax Act, 1961, up to a maximum of Rs.1.5 lakh. It includes VPF contributions as well.
Additionally, if an individual locks in the VPF balance for 5 years and does not make any withdrawals from such EPF account for 5 years, then the interest and maturity amount are also exempt from wealth tax.
Furthermore, the VP Fund, like EPF, is a government-endorsed scheme. Therefore, account holders enjoy the benefits of security of capital as well as guaranteed returns by investing in a VPF.
Here are some of the significant VPF benefits-
To open a Voluntary Provident Fund account, an employee should connect with his employer or the HR team of the company in writing, stating his/her objective to open a VPF account. He should duly mention deducting an additional amount from the salary for contribution to this fund. He should also specify the monthly contribution amount he wishes to invest.
Note that an employee can open a VPF account at any time of the year, however, he/she cannot discontinue the investment under this scheme during the financial year.
If he withdraws the VPF amount within 5 years of account opening, the amount will be taxable as per the regulations of the Income Tax Act.
You can check the VPF balance online using the steps mentioned below-