It is very important for individuals to explore ways in which they can effectively allocate their income to build a substantial financial cushion.
Of the many savings schemes and provident schemes available, that allow investors to earn guaranteed returns and grow their corpus steadily, Voluntary Provident Fund is one of them.
VPF interest rate hovers around the 8.5% per annum mark annually and the returns generated are tax-exempt as well.
A Voluntary Provident Fund is a part of the Employees’ Provident Fund scheme. The Government of India and the Employees’ Provident Fund Organisation (EPFO) enable individuals to allocate a part of their income to their EPF accounts as a Voluntary Provident Fund.
Such allocation must be in addition to the compulsory EPF contribution that one needs to make every month from their salary – 12% of salary in general and 10% for June, July and August.
However, the limit of such contribution to a Voluntary Provident Fund is not specified. Therefore, an individual can allocate 100% of their salary, i.e. basic pay and dearness allowance, as VPF contribution.
Moreover, since VPF is a part of EPF, they both share similar features, including the interest rate of VPF. This interest rate is reviewed every year by the Central Board of Trustees of EPFO in consultation with the Finance Ministry. The VPF interest rate for the Financial Year 2023 - 24 is 8.1%.
However, to understand how interest is calculated on VPF, one must first understand the dynamics of EPF contributions, since interest calculation is largely dependent on the same.
The standard contribution is 12% of salary by both an employee and an employer for organisations that have more than 20 employees.
For organisations that have less than 20 employees, have sick units, or fulfil some other EPFO conditions, employees and employers need to contribute 10% of salary to EPF.
The employer contribution of 12% - 8.33% goes toward Employees’ Pension Scheme (EPS), 3.67% toward EPF, and 0.5% toward Employees Deposit Linked Scheme. However, this structure is only applicable to the wage ceiling of Rs.15000.
When one’s salary exceeds that wage ceiling, employers can choose to –
Since interest rate of VPF and its calculation are based on the balance in an EPF account, the employer’s contribution is pertinent when considering the same.
Interest for a Voluntary Provident Fund is calculated monthly based on the opening balance of each month. This opening balance includes both EPF – employee’s and employer’s contribution and VPF.
Nevertheless, although interest is calculated every month, the same is credited to an EPF account at the end of a financial year.
Individuals must note that VPF interest for the first month is nil since the opening balance of such first month is zero. Regardless, for monthly calculation of interest, a Voluntary Provident Fund interest rate is divided by 1200 and then multiplied by a month’s opening balance to derive that month’s interest.
Example-
Harish joined Company ABC for a salary of Rs.30,000 on 1st April 2019. As per EPFO mandate, his contribution to his EPF account is 12% of his salary. However, he decides to contribute an additional 8% per month to VPF.
His employer pays 3.67% of Rs.15000 as her contribution to Harish’s EPF account. Also, the VPF interest rate 2020 is 8.5% per annum.
The table below illustrates the interest calculation on Harish’s EPF account.
|
Month |
Opening Balance (Rs.) |
Interest (Rs.) [(Opening balance x VPF interest rate) / 1200] |
|
April |
Nil |
Nil |
|
May |
6550 [(20% x 30000) + (3.67% x 15000)] |
46 |
|
June |
13,100 |
93 |
|
July |
19,650 |
139 |
|
August |
26,200 |
186 |
|
September |
32,750 |
232 |
|
October |
39,300 |
278 |
|
November |
45,850 |
325 |
|
December |
52,400 |
371 |
|
January |
58,950 |
418 |
|
February |
65,500 |
464 |
|
March |
72,050 |
510 |
|
Total |
3062 |
Note – For the sake of simplicity, it is assumed that Harish’s salary remains the same throughout the 1-year period.
Therefore, Harish earns Rs.3062 as interest on the balance in his EPF account. Since he contributed 8% over and above the compulsory percentage to the Voluntary Provident Fund scheme, Rs.3062 also constitutes the VPF interest amount.
Individuals can choose to allocate a greater percentage of their salary to a Voluntary Provident Fund to maximise their returns.
The following table shows the VPF interest rates of the last 40 years.
|
Years |
VPF Interest Rates |
|
1979 -81 |
8.25% |
|
1981 – 82 |
8.5% |
|
1982 - 83 |
8.75% |
|
1983 - 84 |
9.15% |
|
1984 - 85 |
9.9% |
|
1985 – 86 |
10.15% |
|
1986 – 87 |
11% |
|
1987 – 88 |
11.5% |
|
1988 – 89 |
11.8% |
|
1989 – 2000 |
12% |
|
2000 – 2001 (April – June 2001) |
12% |
|
2000 – 01 (July 2001 onwards) |
11% |
|
2001 – 04 |
9.5% |
|
2004 – 05 |
9.5% |
|
2005 – 10 |
8.5% |
|
2010 – 11 |
9.5% |
|
2011 – 12 |
8.25% |
|
2012 – 13 |
8.5% |
|
2013 – 15 |
8.75% |
|
2015 – 16 |
8.8% |
|
2016 – 17 |
8.65% |
|
2017 - 18 |
8.55% |
|
2018 – 19 |
8.65% |
|
2019 – 20 |
8.5% |
|
2020 - 21 |
8.5% |
|
2021 - 22 |
8.5% |
|
2022 - 23 |
8.5% |
|
2023-24 |
8.1% |
In the past 40 years, the Provident Fund scheme has been one of the most profitable and secure investment options for working individuals.
When compared with other savings schemes such as Bank FD and Public Provident Fund, the interest rates of VPF are always marginally higher.
However, when interest rates of VPF are compared with ELSS returns, the latter might provide higher earnings but is considerably riskier.