Employee Provident Fund (EPF) is offered to all salaried employees, every month by the employer. In an EPF account, an employee has to contribute a certain amount of money and the employer will do the same amount of contribution. These contributions are generally fixed. This was introduced by the government to assure employees' future financial needs after retirement when he/she can withdraw the lump sum amount of money to fulfill their old age needs. This kind of contribution is tax-free according to government tax rules.
What is a Voluntary Provident Fund (VPF)
But the question is what is a Voluntary Provident Fund (VPF)? It is nothing but an additional contribution by the employee to the same PF account, which is above the minimum contribution fixed by the Employees' Provident Fund Organisation (EPFO). The employer generally contributes 12% of the basic salary of the employee. But the employee can always contribute more than that. Some employees put money in the VPF because the amount is deducted as the same process as EPF, automatically, at the time of salary. It is a hassle-free process, one just needs to renew their VPF contribution yearly. At the starting of a Financial Year (FY), the employee needs to confirm their VPF contribution to the employer.
Voluntary Provident Fund (VPF) – better interest rate
In most cases, when employees get a yearly salary hike, they try to improve their investment options. Also, if an employee does not want to give more time to find better investment opportunities, they invest in VPF. But apart from these casual causes, one can choose VPF because it attracts a better interest rate than the basic PF. The interest rate on VPF and PF is 8.50%. This is a lucrative investment option because no other FD, savings account, or other deposit option will give you this range of interest rate yearly. This is also an assured investment, which means at the time of your retirement, you will get a fixed amount of money, no risk attached with it. Sometimes, employees think, if I invest in the equity markets, like mutual funds, SIPs, or company stocks, I will be able to make good returns in short term. But it must be remembered that your profit or loss will depend on the market. Unlike VPF, which is a safe and secured option.
Voluntary Provident Fund (VPF) – tax savings
According to the union government's regulation, your VPF contribution towards the EPF accounts will be eligible for tax deductions. This deduction is provisioned under Section 80C of the Income Tax Act of 1951. At present, the tax deductions for the employees are restricted to Rs. 1,50,000 in a year. So, you can save up to Rs. 46,800 in your taxes, yearly. Hence, with a salary hike or additional income, you can choose VPF from the next FY, as it is a tax-free, assured investment opportunity. Your VPF investment will have a lock-in period, similar to your EPF investment. You will be able to withdraw money from your VPF when you will be unemployed for more than 2 months, or after your retirement. Till then, you can enjoy this tax-free investment option. When you will be changing your job from one company to another, you can transfer the VPF, just as your EPF.
PF contribution rule on the upper limit
Nirmala Sitharaman, the union finance minister has recently revised the EPF contribution regulation considering its upper limit. The union government has declared that one can enjoy the tax-free benefits under EPF, till the contribution of Rs. 2.5 lakhs, yearly. According to the new Finance Act of 2021, any contribution beyond that amount will be subject to tax. The government initiated this act because "Some people go to the extent of contributing ₹1 crore each month' (into their PF accounts). For such people to get tax concessions as well as an assured income, is not comparable with an employee who earns ₹2 lakh and gets 8% return on their PF savings," according to the finance minister. Hence, if your EPF contribution is lower than that level, you can contribute to the VPF for its tax savings facility. Additionally, if you are open to paying tax on your investment, you can invest more, as the interest rate of VPF is lucrative.
The EPF was introduced to give financial assurance to employees at their old age. Through VPF, you can secure your future better.