What is a Voluntary Provident Fund?
A Voluntary Provident Fund or VPF is a savings scheme offered by employers in India. Under this scheme, employees can choose to contribute a portion of their salary towards a provident fund account. It is a non-mandatory contribution.
The functions of VPS are similar to Employee Provident Funds (EPF) with the difference that EPF is mandatory. Also, under the VPF scheme, employees are allowed to contribute more than the mandatory percentage. The contributions made to VPF are deducted from the employee’s salary before taxation, helping in tax savings.
The accumulated amount in the VPF account earns interest and can be withdrawn upon retirement or resignation. This provides Indian employees with an additional source of savings.
Definitions of VPF by industry leaders:
VPF is a great way to save for retirement. It offers tax benefits and the money you contribute grows over time.
– Aditya Puri, Former CEO of HDFC Bank
VPF is a flexible savings option that can be tailored to your individual needs. You can choose how much you want to contribute and when you want to withdraw your money.
– Chandrashekhar Ghosh, Founder, and CEO of Bandhan Bank
VPF is a great way to build your financial security. The money you contribute to VPF is yours, and you can use it for anything you want, including retirement, a down payment on a house, or your child’s education.
– Uday Kotak, MD and CEO of Kotak Mahindra Bank
5 Features of the VPF Scheme
VPF is a great option to consider when looking for a way to save for the future. It offers tax benefits, flexibility, security, high-interest rate, simplicity, and convenience. Here is the list of 5 features offered by the Voluntary Provident Fund Scheme:
1. Voluntary Contribution
The VPF scheme allows one to make additional voluntary contributions to the provident fund account. This is over and above the mandatory contribution made towards the Employee Provident Fund (EPF).
2. Higher Interest Rate
The interest rate on VPF is higher than the interest rate on other savings options, such as savings accounts and fixed deposits. This means that money can grow faster in a VPF account than in a regular savings account.
3. Tax Benefits
The contributions made to the voluntary provident fund are tax-deductible up to a certain limit. This is stated under the provisions of Section 80C of the Income Tax Act, 1951. This means that contributing to the VPF will reduce a person’s taxable income.
The percentage of salary to contribute to the VPF account can be chosen by every individual user. However, keep in mind that it should not exceed the maximum voluntary provident fund limit set by the EPFO (Employee Provident Fund Organization).
5. Withdrawal Rules
Withdrawal from VPF is generally permitted upon retirement, resignation, or completion of five continuous years of service. Partial withdrawals may be allowed under specific circumstances, like emergencies or higher education expenses.
6 Benefits of Voluntary Provident Fund
VPF is one of the best options to consider when looking for a safe, secure, and flexible way to save for the future. Since the features of the voluntary provident fund have already been discussed, we now move to understand the benefits to be gained from it.
1. Higher return on investment
As compared to the traditional saving options, VPF gives higher returns on investment. This ensures financial security and a comfortable lifestyle when a person who has opted for VPF stops working.
2. VPF is simple
VPF is a simple investment option to understand and manage. One does not need to worry about market fluctuations or choosing the right investments.
3. It is a long-term wealth option
The scheme is designed as a long-term savings scheme. VPF allows a person to accumulate a substantial corpus over time to meet his or her retirement goals.
4. Serves more financial security and stability
VPF is managed by the trusted and regulated Employee Provident Fund Organization (EPFO) under the Government of India. This ensures the security and stability of the savings, giving peace of mind that the user’s hard-earned money is in safe hands.
5. VPF allows availing for loans
Individuals signed under the EPFO can avail a loan against the VPF balance. This can be helpful in meeting any financial emergencies.
6. It is very convenient
VPF contributions can be directly made through the employer’s payroll. This means that one does not have to remember to make a separate contribution each month.
Eligibility Criteria to Open Voluntary Provident Fund
The eligibility criteria for Voluntary Provident Fund (VPF) participation are generally aligned with the criteria for the mandatory Employee Provident Fund (EPF). Here are the common eligibility requirements for VPF:
The individual opting for VPF must be a salaried employee working in the organized sector. This indicates that they must be employed by a company registered with the Employees’ Provident Fund Organisation (EPFO).
One should already be a member of the EPF scheme to contribute to VPF. The EPF account should be already receiving contributions from an employer.
Voluntary Contribution Limit
One can contribute to VPF in addition to the compulsory EPF contribution. The compulsory EPF contribution is 12% of the basic salary and dearness allowance. He or she can choose to contribute any amount above this, up to a maximum of 100% of the salary.
Before opting for VPF, ensure that the employer allows voluntary contributions to the provident fund. While most employers do permit VPF, it is advisable to confirm this with the organization’s HR or payroll department.
Documents required for Voluntary Provident Fund
The documents required by employees to open a VPF account are as follows.
1. Form 10:
A form used by the Employee Provident Fund Organization (EPFO) to open a VPF account.
2. Form 15G/H:
Form 15G and Form 15H are self-declaration forms used to inform banks and financial institutions that an individual does not want tax deducted from their interest income. Form 15G is for individuals below 60 years of age, while Form 15H is for individuals aged 60 and above.
3. Identity Proof:
Any ID card issued by the Government of India such as an Aadhaar card, PAN card, passport, or driver’s license.
4. Address Proof:
Documents like an Aadhaar card, passport, utility bills (electricity, water, gas), or ration card that be used as address proof.
5. Proof of employment:
Documents such as a company salary slip or appointment letter that prove a person is employed under a registered company in India.
6. Bank Account Details:
Information about the bank account, including the account number and IFSC code, is needed to facilitate fund transfers and transactions.
The documents required for opening a VPF account can vary depending on the company or institution. It’s best to check with them for any additional requirements.
Interest Rate of VPF
Currently, the interest rate for VPFis 8.15% for the financial year 2023-24. The interest rate on VPF is set by the Employees’ Provident Fund Organisation (EPFO) every year. It is credited to the VPF account on a monthly basis.
The interest rate on VPF is linked to the government’s benchmark rate. The benchmark rate is the rate at which the government borrows money from the market. The interest rate on VPFis usually 1-2% higher than the benchmark rate.
The VPF interest rate is a guaranteed return on investment. This means that a person can be sure that the investment will grow at a fixed rate every year. This makes VPF a very attractive investment option for those who are looking for a safe and secure investment.
The following table shows the interest rates on VPF for the past 5 financial years.
|Year||Interest Rate on VPF|
Tax Benefits available under Voluntary Provident Fund
VPF is classified under theEEE category.
- Exempt on contribution
- Exempt from the principal
- Exempt on interest
Here are some more tax benefits that can be enjoyed when opting for Voluntary Provident Fund:
- Tax Deduction:Contributions made to a VPF account qualify for deduction under Section 80C of the Income Tax Act. The maximum deduction limit under this section is₹1.5 lakh per financial year.
- Tax Exemption on Interest:The interest is considered tax-free under Section 10 of the Income Tax Act.
- Tax-Exempt Withdrawals:Withdrawals from a VPF account are tax-exempt if the account holder has completed aminimum of five yearsof continuous service. In such cases, the entire withdrawal amount, including the principal and accumulated interest, is tax-free.
- Employer Contribution:In some cases, employers may contribute to an employee’s VPF account. The employer’s contributions are also eligible for tax benefits under Section 80C, subject to the overall limit of₹1.5 lakhs.
If a person withdraws money from their VPF account before completing 5 years of service, they will have to pay tax on the entire amount withdrawn. However, there is a partial exemption available in certain cases. For example, they will not have to pay tax on the amount withdrawn if they are withdrawing it for the following purposes:
- Medical Expenses
- Education Expenses
Contribution Limit to Voluntary Provident Fund
The contribution limit to the Voluntary Provident Fund (VPF)is 100% of the basic salary and dearness allowance. This is set by the Employees’ Provident Fund Organisation (EPFO). An individual can basically contribute up to the same amount as the mandatory contribution to the Employee Provident Fund (EPF).
If a person is enrolled under the EPFO, they are mandatorily required to contribute 12% of their basic salary and dearness allowance to the EPF. However, when it comes to Voluntary Provident Fund (VPF), there is no minimum or maximum limit on the contribution amount. However, the employee’s VPF contribution is typically in addition to the 12% contributed to EPF.
Keep in mind that one is not obligated to contribute to the VPF. Similarly, their employer is also not under any obligation to contribute to the fund.
Rules and Regulations of VPF in India
The rules and regulations of VPF are mostly similar to the Employee Provident Fund. They are set by the EPFO. Here are 7 rules and regulations of VPF in India:
- It is open to all salaried individuals employed under the Government of India who contribute to EPF.
- It is not a mandatory fund. It’s an employee’s choice to opt for it.
- Once opted, one cannot discontinue it in the middle of the financial year.
- If one withdraws money from the fund within the first 5 years of investment, the interest turns taxable.
- It is an individual’s responsibility to request their employer to opt for the VPF scheme.
- The interest rates of VPF change every year according to the benchmark set by the government.
- If thedirect tax codeis implemented, the entire maturity amount of the VPF would become taxable.
VPF Withdrawal Process
Here are some basic questions related to the withdrawal process of VPF.
When can a person withdraw their VPF?
One can withdraw their VPF at any point in time. However, it should be noted that if the withdrawal is made before completing 5 years of investment, the funds will be subjected to taxation. On the other hand, if the investment is held for 5 years or more, the maturity amount can be received without any taxes.
How to withdraw VPF?
Step 1:Fill up Form 31. Download Form 31 from the EPFO website or get it from the employer.
Step 2:Provide the required documents along with Form 31. These documents usually include ID proof, bank details, and proof of address.
Step 3:Submit the form to the employer. The form will be verified by the employer and forwarded to the EPFO.
Step 4:Wait till the EPFO approves the VPF request.
The time taken to process a VPF withdrawal request varies from time to time. However, it usually takes around 2-3 weeks for the EPFO to process a request.
Upon resignation or retirement, the employee will receive the maturity amount from their VPF account. In the unfortunate event of the account holder’s sudden demise, the nominee will receive the accumulated amount. Additionally, VPF funds can be partially withdrawn in the form of loans before maturity.
Are there any complications while withdrawing VPF?
There are a few complications that can be faced while withdrawing from VPF. These include:
- The amount of time taken to process the withdrawal request.
- If a person submits incomplete or incorrect documentation, their withdrawal request may be rejected. Hence, carefully check the documentation before submitting it.
- There may be technical glitches on the EPFO website or in the EPFO’s processing system. If a person faces any technical glitches, he or she should contact the EPFO helpline for assistance.
- In some cases, the wrong amount may be credited to the bank account. If this happens, one has to contact the EPFO and request a reversal of the transaction.
Differences between PF, EPF, and VPF
Here is a table stating the differences between PF, EPF, and VPF:
|Owner||Any Indian individual||Only employed Indian individual||Only employed Indian individual|
|Employee contribution||None||Upto 12% of basic salary||Upto 100% of basic salary|
|Interest rate||8.15% p.a.||8.15% p.a.||8.15% p.a.|
|Tax on maturity||THAT||THAT||THAT|
|Tenure of investment||Upto 15 years||Resignation/retirement||Resignation/retirement|
|Loan Facility||50% withdrawal after 6 years||Partial withdrawals||Partial withdrawals|
Frequently Asked Questions (FAQs)
1. Is the voluntary provident fund tax-free?
Yes, the voluntary provident fund (VPF) is tax-free. Contributions to VPF are eligible for deduction under Section 80C of the Income Tax Act, and the interest earned on VPF is also tax-exempt. This means that the amount you contribute towards VPF reduces your taxable income, leading to potential tax savings.
2. Is VPF better than PPF?
While both voluntary provident fund (VPF) and Public Provident Fund (PPF) offer tax benefits, VPF may be more advantageous for some individuals. VPF typically offers higher interest rates compared to PPF, and there is no limit on the contribution amount for VPF, unlike PPF, which has a maximum annual contribution limit. Therefore, if you have the financial capacity and desire to invest a larger amount, VPF may provide higher returns.
3. Can I withdraw VPF anytime?
Yes, you can withdraw from VPF anytime you need the funds. Unlike the Employee Provident Fund (EPF), which has certain withdrawal restrictions, VPF allows flexible withdrawals. However, if you withdraw from VPF before completing 5 years of continuous service, the withdrawn amount may be subject to taxation.
4. What is the lock-in period of VPF?
There is no specific lock-in period for VPF. This means that you have the freedom to withdraw from your VPF account as and when required. However, it’s important to note that early withdrawals from VPF may have tax implications, especially if the 5-year continuous service requirement is not met.
5. Can VPF be charged every month?
Yes, VPF contributions can be deducted from your salary every month. Similar to the way Employee Provident Fund (EPF) contributions are deducted, your employer can deduct the VPF amount from your salary before disbursing it to you. This helps in regular and systematic savings toward your VPF account.
6. Is VPF taxable on maturity?
No, if you complete a minimum of five years of continuous service, the maturity amount of your VPF account, which includes both the principal amount and the accumulated interest, is tax-exempt. This means that when you withdraw your VPF balance after retirement or resignation, the entire amount you receive is not subject to income tax.
7. What happens to VPF after retirement?
After retirement, you have the option to withdraw the accumulated amount in your VPF account. The maturity amount of your VPF, which includes both your contributions and the interest earned, can be withdrawn in full. This withdrawal is usually tax-free if you have completed the minimum service period of five years.
8. How can I check my VPF balance?
You can check your VPF balance by accessing your EPF account online. The Employees’ Provident Fund Organization (EPFO) provides an online member portal where you can log in using your credentials to view your EPF and VPF balance. Additionally, you can also check your VPF balance using the Unified Mobile Application for New-age Governance (UMANG) app.
9. Will there be an effect on my VPF account if I change jobs?
If you change jobs, your VPF account can be transferred to your new employer. This transfer process ensures the continuity of contributions and accumulated balance in your VPF account. By transferring your VPF account, you can continue to make contributions towards VPF without any disruption or loss of funds.