Have you ever considered investing in the Voluntary Provident Fund? If not, you should consider the same because of the high interest rates, interest income exemption from tax and tax benefits under Sec 80C of the Income Tax Act.
What is the Voluntary Provident Fund Or VPF?
An employee can contribute a maximum of 12 per cent of his basic towards the Employees Provident Fund. However, it is always advisable to contribute more, because the interest is tax free, the interest rates are high and there are tax benefits under SEC80C.
So, the right way to make a contribution is through the VPF, which is nothing but an extension of the EPF. Under the VPF you can make a maximum contribution of your basic salary and dearness allowance. The important thing to note here, is the employer has no obligation and is unlikely to contribute to the VPF, unlike the EPF, where he is obliged to.
What is the interest rate on the VPF?
The interest rates on the EPF and the VPF are both currently pegged at 8.50 per cent. However, this changes every year, though we do not believe that it would fall dramatically from these levels. Remember, the interest is decided by the Government, which could vary every year.
So, the post tax returns on the VPF is very high, making it a very attractive bet. In fact, the PPF, EPF and VPF all have similar tax benefits.
However, a point worth mentioning is that if you withdraw the VPF before 5 years, the interest earned would be taxable. So, you need to be careful and go for a long term tenure.
Who can open a Voluntary Provident Fund Account?
This scheme can be opened by all employees who are on the payrolls of the company. If you switch from one job to the other, there are no worries as they are all linked and so would move accordingly. You can use the funds also for withdrawal, but only under certain circumstances. For example, you can decide to withdraw for a marriage or for a medical emergency etc.
However, as we need to emphasize that the interest earned on the VPF is not taxable after 5-years of operations. So, you need to keep the same in mind.
The VPF is a good bet if you are able to contribute for 5-years. Presently, with bank interest rates hovering around that 5 per cent mark for fixed deposits, an interest rate of 8.5 per cent is a great bet. We suggest that investors should give a serious look to the VPF. Though the Public Provident Fund is also a great bet, the lock-in period is higher, which is a slight problem.
About the author
Sunil Fernandes has spent 26 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. Sunil's areas of interest include commodities, equities, mutual funds, tax planning and debt instruments.