What is Voluntary Provident Fund? Benefits of VPF

The Voluntary Provident Fund, or VPF, is an optional savings plan that employed individuals can contribute to in addition to the mandatory Employee Provident Fund (EPF). This scheme offers noteworthy advantages, as it is supported by the government, ensuring security with low risks and promising high returns.

In this article, we will demystify the concept of the Voluntary Provident Fund, shedding light on crucial details like interest rates, benefits, the process for opening an account, and more.

What is the Voluntary Provident Fund?

The Voluntary Provident Fund is a voluntary contribution made by an employee to their provident fund (PF) account, exceeding the standard 12% contribution to the EPF. Employees can contribute up to 100% of their Basic Salary and Dearness Allowance to the VPF, earning interest at the same rate as the EPF. Employers are not obligated to contribute, and employees are free to choose whether or not to participate. Once enrolled, contributions cannot be terminated before completing a minimum tenure of 5 years.

Who Can Invest in a Voluntary Provident Fund?

The Voluntary Provident Fund serves as an extension of the EPF. It is specifically designed for individuals who are employed and receive their income in the form of a salary. However, eligibility for VPF is only extended to those individuals who have their monthly salary payments processed through a specific or designated salary account.

Benefits of Voluntary Provident Fund

Tax Efficiency

The VPF falls within the Exempt Exempt Exempt (EEE) category, offering tax exemptions on contributions, principal, and interest. This tax-efficient nature makes it a savvy choice for individuals looking to optimise their savings while minimising tax liabilities.

Secure Investment Option

Managed by the Government of India, the VPF provides a secure investment avenue with a fixed interest accrual. This stability distinguishes it from potentially riskier long-term investments, making it an attractive option for those prioritising financial security.

Simplified Application Process

Opening a VPF account is a straightforward process. By approaching the HR/Finance team and submitting a simple registration form, employees can seamlessly integrate the VPF into their existing EPF account.

Flexible Employment Transition

The VPF underscores its flexibility by allowing easy transferability between employers. This feature ensures that individuals changing jobs can smoothly continue their savings journey without disruption.

Attractive Returns

With a current interest rate of 8.5%, the VPF offers competitive returns. Contributions and accrued interest up to ₹1.5 lakh annually are tax-exempt under Section 80C, enhancing the overall financial appeal of the VPF as a long-term investment.

How to Open a VPF account?

To open a VPF account, submit a written request to your employer or HR department, specifying your details and the desired monthly contribution from your primary salary. Remember that discontinuing the VPF investment within the financial year is not allowed. You can initiate this process during the financial year, but withdrawing the VPF amount within the initial five years will make it taxable.

VPF Interest Rate

The Indian Government determines the interest rate for the Voluntary Provident Fund and undergoes annual revisions. As of the fiscal year 2023-24, the VPF interest rate stands at 8.15% per annum. This rate, set by the government, is crucial in determining the returns individuals can accumulate on their VPF contributions. If you’re keen to estimate potential returns, you can use a Voluntary Provident Fund calculator to gauge the impact of this interest rate on your contributions.

VPF Tax Benefits

The Voluntary Provident Fund emerges as a top-notch tax-saving option in India. According to Section 80C of the Income Tax Act, 1961, employees can avail of tax benefits of up to ₹1.5 lakh on their VPF contributions. Furthermore, the interest earned on the VPF is exempt from tax. Notably, the maturity proceeds of the VPF become tax-exempt when withdrawn after completing a five-year tenure from the account’s opening.

VPF Tax Exemption

Categorised under the EEE framework, the VPF enjoys comprehensive tax exemptions. This includes the VPF contributions, interest earned, and the principal/maturity amount, making the entire investment and returns tax-free. However, it’s crucial to note that if the VPF amount is withdrawn within the initial five years of investment, it becomes subject to taxation. The tax-free status applies only to withdrawals made after completing a minimum five-year investment period.

VPF Contribution Limit

The voluntary provident fund provides flexibility in contribution limits, with no set maximum or minimum per year. Individuals can contribute up to 100% of their monthly income, combining salary and dearness allowance, towards their VPF account. Notably, employers are not obliged to contribute to the VPF account. Additionally, once the VPF account is initiated, it cannot be closed for the initial five years, and contributions cannot be discontinued during this period.

VPF Withdrawal Rules

The voluntary provident fund allows Partial or complete withdrawals, with the option to take loans from the accumulated funds. However, tax applies to the maturity amount if a withdrawal occurs before the 5-year minimum tenure. Upon resignation or retirement, the final maturity amount is paid. In the case of the account holder’s untimely death, the nominee receives the accumulated funds. Withdrawals are also enabled for various reasons, including medical emergencies, marriage, education expenses, and property-related needs.

VPF Lock-In Period

There is a mandatory lock-in period of five years for a voluntary provident fund account. Withdrawals from the EPF before completing this five-year tenure are subject to taxation. This stipulation ensures a commitment to long-term savings and adherence to tax regulations governing early withdrawals.

How to Check the VPF balance?

After getting a fair understanding of what a voluntary provident fund, and what voluntary provident fund tax benefit makes it a compelling choice, let’s take a look at the steps for checking the VPF balance.

Go to the official EPFO website.
On the ‘Our Services’ page, choose ‘For Employees’.
Select ‘Member Passbook’ from the ‘Services’ options.
Log in by entering your UAN and password, then click ‘Login.’
Choose the Member ID and click ‘View Passbook.’
Your EPF passbook will show all the details of your VPF account, giving you a clear picture of your balance and transactions.

EPF vs VPF vs NPS

Particulars	EPF	VPF	NPS
Eligibility	Accessible to any salaried individual, offering retirement benefits and financial security.	An extension of EPF, available to salaried individuals with an existing EPF account.	Open to all Indian citizens aged 18 to 60 years, providing a long-term pension solution.
Period of Investment	Contributions are maintained until retirement or unemployment, ensuring financial stability during non-employment periods.	Operates on a flexible tenure, with an option to withdraw after a minimum of five years or unemployment.	Continues until retirement, ensuring long-term wealth accumulation.
Employer Contribution	Contributes 12% of employee’s basic salary and dearness allowance.	Does not mandate employer contributions, giving individuals autonomy in their financial goals.	Optional for private companies, allowing flexibility in employer’s role in retirement savings.
Employee Contribution	Contributes 12% of basic salary and dearness allowance.	Permits contributions up to 100% of basic salary and dearness allowance, providing high flexibility.	Allows up to 10% of basic salary and dearness allowance, with additional voluntary contributions.
Tax Benefits	Eligible for Section 80C tax deductions up to ₹1.5 lakh.	Qualifies for tax deductions up to ₹1.5 lakh under Section 80C, ensuring financial advantage.	Offers deductions up to ₹1.5 lakh under Section 80CCE and 80CCD(2), with added benefits for self-employed individuals.
Partial Withdrawal	Allows partial withdrawals for specified purposes, providing financial flexibility during emergencies or significant life events.	Allows partial withdrawals for specific purposes after a minimum of five years, serving as a financial safety net for unforeseen circumstances.	Permits partial withdrawals after three years for specific needs, ensuring liquidity while maintaining long-term savings.

Conclusion

To sum it up, the voluntary provident fund is a flexible and straightforward way to save for the future. With a fixed interest rate, easy application, and the freedom to contribute more, it’s a practical choice for securing retirement funds. Its tax benefits and option for partial withdrawals make the VPF a wise financial move, representing a step towards a more secure and stable financial future.