If an individual is saving money from his salary, one of the investment option that he/she should look at is to scale his/her Employees Provident Fund (EPF), if he or she is already a part of the same. It can be done through the The Voluntary Provident Fund or VPF, which is an extension of the EPF and you can contribute way beyond the mandatory 12%. In fact, you can contribute 100% of your basic salary and dearness allowance to the VPF, which offers all benefits like the Employees Provident Fund and is run by the same authority.
Why employees should subscribe to the VPF?
To begin with because of the interest rates and the tax benefits. The VPF comes under the (EEE - exempt on contribution, exempt from the principal and exempt on interest category).
So, the contribution qualifies for tax exemption under Sec80C of the Income Tax Act. If you work and contribute for a period of 5-years, the interest earned is also tax free.
Now, for the best part. If you were to invest the surplus from your salary in bank deposits, you would get an interest rate of of at best 5.5%. The The Central Board of Trustees of Employees' Provident Fund Organisation recently recommended 8.50% rate of interest to EPF subscribers for the financial year 2020-21.
Now, we are not saying that the rate of interest for the future would be the same, but, we do believe that it could hover around the same rates, with a good 2% to 3% higher than bank deposits. And, remember bank deposit interest rates are not tax free in the hands of investors.
How VPF compares with others
|1-2 years||2-3 years|
|EPF Interest for 2020-21||8.5%||NA|
|State Bank of India||4.9%||5.2%|
|Post Office Time Deposits||5.5%||5.5%|
Funds can be used in an emergency
You can avail the Voluntary Provident Fund money as loans and partial withdrawals are also permitted by the EPF authority. However, it is advised not to withdraw the amounts before a period of 5-years as there would be income tax payable on the maturity amount.
If you retire or choose to opt out, the amount along with interest is paid. In case of untimely death of the account holder, the nominee can get the accumulated fund in the VPF account.
The amount can be withdrawn for many reasons which include:
- Payments of medical bills for the individual and his kin
- Cost-intensive events like higher education and marriage
- Payments for house construction or purchase of new land or a house.
No hassles when you change jobs
These days there are no hassles when you change a job as it is all linked to the Universal Account Number which does not change and also to the Aadhaar Card. So, even if you switch jobs it does not impact your VPF. We strongly recommend this instrument for employees who are part of the EPF as interest rates in the economy have now dipped to alarmingly low levels and the Voluntary Provident Fund offers a pretty decent interest rate.