Voluntary Provident Fund: Are There Benefits To Higher Than Mandatory EPF Contributions?

After extreme volatility recently seen the stock markets and mutual fund investments, you may be looking at more stable options to put your savings aside for the long term.

One such conservative investment tool is the EPF (Employees' Provident Fund) that you are mandatorily required to contribute to every month (if you are a salaried employee) and comes with a government guarantee.

If you wish to, you can make more than the minimum contribution towards EPF.

What is Voluntary Provident Fund?

While you are required to make a compulsory contribution of 12 percent of your basic pay towards EPF, that is the minimum contribution an employee can make. You are allowed invest as much as 100 percent of your basic salary (plus Dearness Allowance, if any) towards the provident fund and this additional portion, in excess of the 12 percent is known as VPF.

Interest earned on the additional contribution will be the same as that on EPF, as decided by the Government of India.

Who can opt for VPF?

Anyone with an EPF account as part of their employment can do so.

Employer contribution

In EPF, the employee and employer make an equal contribution towards the retirement fund, however, the employer is under no obligation to do so in the case of VPF.

As the name suggests, it is a voluntary contribution that the employee decides to make towards his/her PF account. The employee will separately need to inform their employer on the extent of the contribution he/she wishes to make.

Taxation

Just as in EPF, contributions towards VPF fall under the EEE (Exempt-exempt-exempt) category of taxation which means 1)contributions made 2)interest earned 3)withdrawals made are exempt from tax.

This tax exemption can be claimed under section 80C (within the total limit of Rs 1.5 lakh in a financial year) if you opt for the old tax regime.

However, if withdrawals are made before the completion of minimum tenure of 5 years, these withdrawals are taxable and such tax will be deducted (TDS) before the amount is credited to your account.

Withdrawal

Partial withdrawal as loans as well as the complete withdrawal of VPF is allowed. As stated above, if withdrawals are made before the completion of minimum tenure of 5 years, taxes are applicable.

Discontinuation of VPF

One you choose to start making contributions towards VPF, you cannot terminate or discontinue the plan before the completion of 5 years.

Change of employment

On change of employment, note that VPF is linked to UAN as well as Aadhaar will makes it easy to transfer your account to the new location and continue making contributions through your new employer.

Is it ideal for you?

EPF or VPF is mainly a retirement or pension fund. Whether or not you should be opting for VPF varies on an individual case basis. Here are some points to consider to help you make a decision:

• If you start contributing towards VPF, you will need to continue for a minimum period of 5 years.
• Interest rate is revised every year and announced at the end of the financial by the government based on market conditions. In March, the EPFO (Employees Provident Fund Organisation) announced 8.5 percent interest for EPF subscribers for the financial year 2019-20, which is a 7-year low.
• Consider your age and risk-taking capacity. The interest rates offered at the moment are attractive when compared to a fixed deposit and would be ideal for someone close to retirement, as one cannot afford to take risks with their savings if they are nearing 60 years of age. On the other hand, if you are young, there are many market-linked investments that could fetch higher returns with time.
• It will also depend on if you can manage to keep a large portion of your salary locked in PF for retirement. If you have alternative sources of income to manage a sudden increase in expenditure, you could consider VPF.
• There is government safety guaranteed on all the contributions you make. This means that even if you may earn smaller interest rate, all your corpus contributed towards EPF will not be lost as one could in other risky investments.