It is always 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.
What is a Voluntary Provident Fund?
It is a government-endorsed retirement-cum savings scheme that allows individuals working in the organised sector to allocate a portion of their salary into their EPF account. The VPFcan be viewed as an extension of the Employees’ Provident Fund.
However, in the case of EPF, both an employee and an employer contribute to such employee’s EPF account. In the case of a Voluntary Provident Fund, only the concerned employee shall contribute. Nevertheless, an employer can choose to deposit an additional amount over and above the mandated percentage of contribution in an employee’s EPF account.
For June, July and August 2020, the compulsory percentage of EPF contribution is 10% of an employee’s salary – basic pay and dearness allowance – for both an employee and an employer. The standard rate is 12%. Therefore, when individuals decide to contribute an extra portion of their income over and above the compulsory percentage, it is considered as a VP Fund.
Since in essence, a Voluntary Provident Fund is an extension of EPF the former enjoys the same benefits as the latter.
Features of a Voluntary Provident Fund
The numerous features of a Voluntary PFare discussed below –
Individuals who are employed in the organized sector of the economy are eligible for a Voluntary Provident Fund. Moreover, EPF is only mandatory for organizations that employ more than 20 individuals. Therefore, one must work in an EPF-recognised organization to have a Voluntary Provident Fund.
Organizations 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.
Creating a Voluntary Provident Fund
Initiating a Voluntary Provident Fund is a convenient and straightforward process. Individuals can simply convey in writing their decision of contributing 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 VPF contribution. A person can subscribe to VPF at any point in a financial year. However, once initiated, such subscriber cannot discontinue their contribution in due course of said financial year.
VPF interest rate
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 organization 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 2019 – 20, the EPF interest rate was set at 8.5% – a 1.5% reduction from the previous year’s rate. This same percentage is also applied when calculating the interest on a Voluntary Provident Fund.
Contribution to VPF
EPFO has no strict guidelines concerning VPF contributions. 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 – 10% for June, July and August 2020 and 12% in general.
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 defray the following expenses –
- Repayment of loan.
- Purchasing or constructing a residential property.
- Education of child.
- Marriage of self or someone dependent.
- Medical reasons.
Nevertheless, the minimum threshold to avail all VPF tax benefits are 5 years. If an individual chooses to withdraw before 5 years of lock-in, then he/she might lose out on exemptions.
VPF withdrawal facilities
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 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.
Tax exemptions on VPF
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 lock 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 the security of capital as well as guaranteed returns by investing in a VPF.
Thus, a VP Fund makes for a lucrative option to expand one’s savings corpus and create a financial safety net, post-retirement.