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  • Writer's pictureSahastha

Voluntary Provident Fund

Updated: Oct 4, 2023

Voluntary Provident Fund is the extended version of Employees’ Provident Fund. Here the subscriber can retain control to the periodic assigning of a specified amount of funds to his/her provident fund, voluntarily. It also helps the subscriber to build savings portfolio and provides long term savings options.

Usually in Employees’ Provident Fund, one has to pay 12% of his/her basic salary towards its account but in this a subscriber can pay 100% of his salary, voluntarily. This contribution is known as the Voluntary Provident Fund. But it is a mandate to pay more than 12% of the salary in the Voluntary Provident Fund. Under VPF, you can increase your share of EPF contribution, but the employer won’t exceed the 12% threshold. The additional amount you contribute, beyond the threshold set by the Employees’ Provident Fund Organization (EPFO), goes into VPF.

Who can invest?

VPF is an extension of the Employees’ Provident Fund (EPF). Only those salaried employees who have an active EPF account and regularly contribute towards EPF can put money in VPF. As the name suggests, it is a voluntary contribution which is over and above the statutory EPF contribution.

Why you need to be careful before investing in VPF.

EPF, VPF are some of the popular tax-free investment options available to investors.

Going forward, interest income from the Voluntary Provident Fund (VPF) will be subject to tax provided the specified investment limit is breached.

In the case of employees who contribute more than ₹2.5 lakhs per annum towards Employees’ Provident Fund account or the Voluntary Provident Fund, the interest income earned will be fully taxable in the hands of the employee. This will be effective on contributions made from April 1, 2021. Some employees contribute more than the mandatory 12 per cent towards PF. The PF rules allow that but it is not mandatory for the employer to match that additional contribution. Employees opt for VPF to earn a safe and tax-free return on their additional contributions.

As of now, the entire PF contribution towards EPF or VPF earns tax-free return and the PF amount enjoys EEE status. Going forward, if your monthly basic salary is above ₹1.75 lakhs ( just the basic salary and not your total monthly income), your monthly contribution will be above ₹ 20,835, which is ₹2.5 lakhs in a year, then the interest income earned on the exceeded amount is taxable.

For example, for someone with a basic salary of ₹1 lakh, the monthly contribution is ₹12,000 which is about ₹1.44 lakhs in a year. The employee contributes an additional 12 per cent into VPF taking the total contribution to ₹2.88 lakhs in the year. In such a case, the interest earned on ₹38,000 (excess of ₹2.50 lakhs) will now get taxed.

The new PF contribution rules will not impact an employee whose monthly contribution is below ₹20,833. However, if your basic salary is above ₹1.75 lakhs, there’s no escaping tax on interest earned.

Therefore, investors need to be careful when saving more than ₹ 2.5 lakhs per annum in VPF during the year. Besides returns, the income tax plays an important role in creating wealth over the long term. Not all investments generate tax-free income and the income earned is subject to income tax based on one’s tax-rate. The post-tax return is an important factor that investors need to consider before selecting any investment option.

Why is it still a relevant option?

As mentioned previously, a Voluntary Provident Fund enjoys all the benefits of EPF, including tax benefits. Contributions made to an EPF account in a specific year are exempt from taxation under Section 80C of the Income Tax Act, 1961 up to a maximum of ₹1.5 lakh. It includes VPF contributions as well.

Additionally, if an individual lock in the VPF balance for 5 years and does not make any withdrawals from such EPF account for 5 years, then the interest and maturity amount are also exempt from wealth tax.

Furthermore, the VP Fund, like EPF, is a government-endorsed scheme. Therefore, account holders enjoy the benefits of the security of capital as well as guaranteed returns by investing in a VPF. It’s one of the safest debt option for people who are looking for good return and low risk.

Thus, a VPF makes for a lucrative option to expand one’s savings corpus and create a financial safety net, post-retirement.

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