Voluntary Provident Fund

Introduction

The Voluntary Provident Fund (VPF) is an extension of the Employees’ Provident Fund (EPF) that allows salaried employees to contribute more than the mandatory 12% of their basic salary and dearness allowance. This additional contribution helps employees build a substantial retirement corpus with the benefit of tax-free interest and safe returns. As a long-term savings scheme, the Voluntary Provident Fund is an attractive option for employees looking for a secure investment with guaranteed returns.

Features of Voluntary Provident Fund (VPF)

• Additional Contribution: Employees can voluntarily contribute more than the statutory 12% of their salary into the VPF account, up to 100% of their basic salary and dearness allowance.
• Interest Rate: The interest rate on the Voluntary Provident Fund is the same as EPF and is determined annually by the Government of India. Currently, it stands at 8.15% for FY 2023-24.
• Tax Benefits: Contributions qualify for tax deduction under Section 80C of the Income Tax Act, 1961.
• Risk-Free Investment: Backed by the Government of India, ensuring capital safety and guaranteed returns.
• Lock-in Period: Although VPF has no fixed tenure, funds can only be withdrawn under specific conditions.
• Employer Contribution: Unlike EPF, the employer is not required to contribute to Voluntary Provident Fund.

Eligibility Criteria for VPF

• Only salaried employees who receive a salary through an EPF account can opt for VPF contributions.
• Employees must already have an EPF account to be eligible for VPF.
• Self-employed individuals and non-salaried individuals cannot invest in Voluntary Provident Fund.

How to Enroll in VPF

1. Approach the Employer’s HR/Finance Department: Employees must inform their employer about their intention to contribute to VPF.
2. Submit a VPF Request Form: The employer provides a form where employees specify the additional percentage of salary they wish to contribute.
3. Payroll Deduction: Once approved, the additional VPF contribution is deducted from the salary every month.
4. Automatic Transfer: The VPF amount gets deposited into the EPF account along with the regular EPF contributions.

VPF Interest Rate & Tax Benefits

Current Interest Rate on VPF

• The interest rate on the Voluntary Provident Fund is linked to the EPF interest rate, revised annually by the Employees’ Provident Fund Organisation (EPFO).
• For FY 2023-24, the VPF interest rate is 8.15%.

Tax Treatment of VPF

1. Employee Contribution: Eligible for tax deductions under Section 80C, up to ₹1.5 lakh per year.
2. Interest Earned:
   • Interest up to 9.5% is tax-free.
   • Interest exceeding this threshold is taxable as per the employee’s income tax slab.
3. Withdrawal Taxation:
   • If withdrawn before 5 years of continuous service, the entire corpus, including interest, is taxable.
   • Withdrawals after 5 years are tax-exempt.

VPF vs EPF: Key Differences

Withdrawal Rules for Voluntary Provident Fund

VPF follows the same withdrawal rules as EPF. Employees can withdraw the amount only under certain circumstances, such as:

1. Retirement: Upon reaching the age of 58 years.
2. Resignation or Job Change: Employees can transfer their VPF balance to a new employer’s EPF account.
3. Medical Emergency: In case of hospitalization, critical illness, or surgery.
4. Home Purchase or Construction: This can be used for buying land, constructing a house, or repaying a home loan.
5. Higher Education: Fund education expenses of self or children.
6. Marriage Expenses: Withdrawal allowed for personal marriage or children’s marriage.

Note: Withdrawals before 5 years of continuous service attract tax deductions.

Pros and Cons of VPF

Pros

• High Interest Rate: Earns the same interest as EPF, ensuring steady growth. 
• Tax-Free Returns: If withdrawn after 5 years, the returns are fully tax-exempt. 
• Government-Backed Security: Ensures risk-free investment with guaranteed returns. 
• Encourages Long-Term Savings: Helps employees build a larger retirement corpus. 
• No Employer Contribution Needed: Employees can contribute independently without employer involvement.

Cons

• Lack of Liquidity: Premature withdrawals are restricted and taxable. 
• Long Lock-in Period: Cannot be accessed freely for immediate financial needs. 
• Taxable Interest Beyond Threshold: Interest earned over 9.5% is taxable. 
• No Employer Contribution: Unlike EPF, the employer does not contribute to VPF.

Why Should You Invest in VPF?

• If you are a salaried employee looking for a safe and secure investment.
• If you want tax-free returns and guaranteed interest.
• If you are planning for long-term financial goals and retirement savings.
• If you have already exhausted other tax-saving options under Section 80C.
• If you seek risk-free alternatives compared to volatile investment options like mutual funds or stocks.

Conclusion

The Voluntary Provident Fund (VPF) is a secure, high-interest savings option that provides tax-free benefits and helps salaried employees build a strong retirement corpus. With government-backed security, guaranteed returns, and tax-saving advantages, the Voluntary Provident Fund is an excellent choice for individuals looking for long-term financial stability. However, since it comes with withdrawal restrictions, employees should carefully plan their investments based on their financial needs.