EPF is considered to be a forced investment and most of us get a sense of relief that our retirement fund is being generated without having to put that extra effort. However, with the rising inflation, the value of your retirement fund goes down with each passing day. You could be running short of retirement money if you have pinned hopes solely on EPF. There is another way in which you could give that extra push to your savings, which is VPF. VPF (Voluntary Provident Fund is an employee contribution towards the provident fund corpus. As per the EPF Act, you have to contribute 12% of your basic, DA, and retaining allowance, towards EPF. You can additionally contribute higher than this amount by your choice voluntarily contributing up to 100% of basic and DA. This contribution is credited to your VPF account. The amount is automatically deducted from your salary, therefore encouraging disciplined investing. The VPF amount earns a fixed interest every year and it is also eligible for deduction under Section 80C of the Income Tax Act. Although VPF is a choice made by the employee, it is still a part of the EPF and all the rules of the EPF are applicable to VPF.
What is the process of opting for VPF?
In order to opt for VPF, you will have to inform your employer about the additional contribution you wish to make. You will be asked to write an application in the format provided by the employer and submit the same. You will be required to announce a fixed percentage or amount to be paid as an additional contribution towards VPF. Most employers allow timelines within January, April, or October to enter or exit the VPF scheme.
The VPF amount has a long lock-in period and should not be misunderstood as a short-term investment. It can be withdrawn as a part of the PF when it reaches its maturity. According to the EPF Act, the final PF settlement can be claimed after attaining 55 years of age, or reaching retirement. However, it is possible to make a partial withdrawal if you are close to retirement. If an employee is above 54 , 90% of the accumulated amount with interest, can be withdrawn.
Why VPF is a good idea?
EPF is definitely a good idea in terms of a debt instrument. The EPF interest rate has gone up from last year’s 8.75% to 8.8% this financial year. If you were to invest in other debt investments such as fixed deposits which offer 7% to 9% interest p.a., you would be required to have an appetite for risk along with it. Also, they would be taxable and would require you to pay a post-tax return of about 5.5% p.a. However, PPF is a tax-free return scheme but comes with a longer lock-in period. NPS (National Pension Scheme) is again partially tax-free, the returns are market-linked, and the lock-in is longer. On the other hand, debt mutual funds are also market-linked with taxable gains. Whereas, the EPF money is sovereign-backed and offers tax-free interest.
VPF is a good option for investors who are risk-averse in case Section 80C is not exhausted. It is advisable not to be risk-averse in terms of long-term savings. If Section 80C were to get exhausted, saving through VPF is a good option for creating a tax-free fund.