Provident Funds (PFs) are government-backed investment options that are great avenues for long term wealth creation. Of its few variants, the Voluntary Provident Fund (VPF) is one of the most convenient avenues for the creation of substantial retirement funds. However, like any other formal savings scheme, the Voluntary Provident Fund is subject to VPF rules that govern its various facets.
However, before learning about such rules, it is crucial to know about the scheme in question, i.e. the Voluntary Provident Fund.
What is the Voluntary Provident Fund?
It acts as a savings-cum retirement scheme explicitly for individuals employed in the organized sector. The Voluntary Provident Fund is essentially a subset of the Employees’ Provident Fund (EPF).
Employees’ Provident Fund is a mandatory savings scheme for employees of an organization with more than 20 individuals working in it. In the case of EPF, both an employee and their employer are mandated by law to contribute 12% of such employee’s salary – basic pay plus dearness allowance – in his/her EPF account.
However, a Voluntary Provident Fund is not compulsory, as the name suggests. An employee can voluntarily choose to contribute an additional portion of his/her income over and above the EPF mandated percent in his/her EPF account. That extra portion acts as a VPF, which does not require the creation of a separate account, according to Voluntary Provident Fund rules.
Moreover, as per VPF rules, an individual can choose to contribute 100% of his/her income to an EPF account as a Voluntary Provident Fund. However, in the case of VPF, an employer is not liable to contribute any additional amount over and above what is mandatory. But, an employer can choose to make further contributions.
What are the Basic VPF Rules?
Like any other savings scheme, individuals must adhere to specific rules when opting for a Voluntary Provident Fund. These are discussed below –
- You cannot opt-out of or withdraw from a VPF scheme in the middle of the year.
- Only salaried professionals enrolled with the EPF can avail the VPF scheme
- The entire maturity amount becomes taxable if the direct tax code comes into effect
- You can contribute 100% of basic plus dearness allowance (DA) as an investment in VPF.
- If the VPF money withdrawal takes place within five years, you need to pay tax on the interest amount earned from your contribution towards the VPF.
How to Enrol in VPF?
One of the reasons why a Voluntary Provident Fund is a lucrative savings scheme is because of its straightforward initiation process. Individuals willing to contribute an additional portion of their income in their EPF account can simply intimate their decision to their organization’s HR department or accounts department. Furthermore, as per VPF rules, individuals need to fill out a VPF application form.
How to Contribute to VPF?
One essential and straightforward criterion for contribution to a Voluntary Provident Fund is that the amount shall be over and above the compulsory contribution to an EPF account, i.e. 12%.
For instance, assume that Suresh’s basic pay plus dearness allowance amounts to Rs.20,000. Therefore, 12% of his income would be Rs.2400. In that case, if Suresh wants to create a Voluntary Provident Fund, he must contribute more than Rs.2400 out of his total income.
However, as per recently amended and temporary VPF rules, both an employer and an employee are obligated to contribute only 10% of their income to EPF for June, July, and August 2020.
Nevertheless, employees can continue to contribute more than they are obliged to as a Voluntary Provident Fund to maintain their retirement funds. Moreover, individuals can contribute up to 100% of their salary (basic pay + dearness allowance) as VPF.
VPF Eligibility Criteria
According to the Voluntary Provident Fund rules, only individuals working in the organized sector are allowed to have VPF. Therefore, admission to this savings scheme is not allowed to self-employed persons or employees belonging to the unorganized sector.
Moreover, organizations with 20 or more people on its payroll must open EPF accounts for their employees. However, organizations with less than 20 employees can also choose to do so. While in the former case, employees have the discretion to possess a Voluntary Provident Fund; in the latter case, it depends on whether their employer entertains Employees’ Provident Fund.
VPF Rules and Guidelines & Taxation
- Lock-in period
As per Voluntary Provident Fund withdrawal rules, contribution to a VPF account is subject to a maturity period of 5 years. Therefore, an individual cannot withdraw any sum from their Voluntary Provident Fund before the completion of 5 years sans repercussions.
In case a person chooses to withdraw, fully or partially, before the lapse of 5 years, then such amount is subject to taxation as per VPF withdrawal rules.
Ideally, when an individual retires or resigns, the entire accumulated amount in EPF is paid to him/her. Additionally, such funds are also released and disbursed to a nominee when an individual passes away untimely, as per VPF withdrawal rules 2020.
Furthermore, VPF rules allow for partial withdrawals from a Voluntary Provident Fund in the form of loans. It is also possible to withdraw the entire accumulated corpus as well.
Moreover, an EPF account can be broken under the following circumstances –
- Payment of loans
- Child’s education
- Medical emergency
However, individuals must note the maturity period if they want to avoid paying taxes on the same.
The Voluntary Provident Fund is one of the most preferred savings schemes by working individuals due to its advantageous tax implications. The contributions made to an EPF account, including what is accounted as a Voluntary Provident Fund, are exempted from tax calculation under Section 80C of the Income Tax Act, 1961.
Moreover, the accrued interests on the balance as well as the maturity amount are free from wealth taxes. However, to avail such tax benefits on interest and maturity amount, individuals must withdraw the corpus after the completion of 5 years. If an individual withdraws before that, then he/she must pay taxes on the same.
Lastly, the interest rate on a Voluntary Provident Fund is similar to that of EPF, as per VPF rules. The EPF/VPF interest rate is announced every year by the Indian government and is subject to change. Currently, the EPF interest rate is 8.5%.
These are a few crucial VPF rules that an individual must be aware of before choosing to contribute to such a fund, to create a substantial savings corpus.
VPF Rules – Frequently Asked Questions
Ques. Will there be issues with the VPF account if I change my job?
Ans. The VPF can be changed from the old company to the new one easily as the account is linked to an individual’s Aadhaar card.
Ques. Is there any difference between the Employees Provident Fund (EPF) and the Voluntary Provident Fund (VPF)?
Ans. VPF is an extension of EPF. When it comes to EOF, employees must contribute 12% of their basic salary and dearness allowance towards the scheme. However, in case of VPS, the contribution depends on the individual and it can also be 100%.
Ques. Are there any eligibility criteria to open a VPF account?
Ans. A VPF account can be opened by any individual who is a part of an organization’s payroll.
Ques. How to convert an EPF account to VPF account?
Ans. An EPF account can be easily converted to a VPF account. To do that, the employee needs to notify the employer regarding the opening of a VPF account. The additional amount that an individual would like to invest in a VPF account should also be mentioned to the employer.