VPF ( Voluntary Provident Fund ) – Interest Rate, Features and Tax Benefits

What is a VPF?

A VPF is a contribution that one makes towards their provident fund account over and above their Employee Provident Fund contribution. This is a scheme made specifically for salaried employees who wish to add to their provident fund. It is also known as the Voluntary Retirement Fund Scheme and is basically an extension of the Employee Provident Fund.

This contribution is made over and above 12% of the contribution made by an employee towards their EPS. The employee can contribute up to 100% of their basic salary as well as their Dearness Allowance (DA). The interest earned on the VPF is credited to their EPF account and the interest offered is as per the EPF scheme.

Once a plan for VPF has been chosen, it cannot be terminated or discontinued before the completion of the base tenure of 5 years. The employers are under no obligation to contribute to the VPF of their employees.

Features of VPF Scheme

  1. Employees can contribute 100% of their salary to the VPF account.
  2. This scheme is specifically for salaried employees who are working in an organization that is recognized by the EPFO. (Employee Provident Fund Organisation of India)
  3. The employees are not obligated to enroll themselves in this scheme and can do so only if they wish to.
  4. They can enroll themselves in the VPF accounts at any time during the Financial Year.
  5. The minimum time period or maturity term for this scheme is of 5 years and the investments cannot be withdrawn before the tenure is completed.
  6. The interest rates are regulated by the government of India and are announced in the annual budget of every financial year.
  7. The individual could withdraw the entire amount from their account before the end of the tenure but would be subjected to tax implications. Moreover, partial withdrawals such as loans are allowed in VPF accounts.
  8. The employee is entitled to the final maturity amount at the time of resignation or retirement from employment.
  9. In a situation of an untimely death of the employee, the payout could be done to the nominee or legal heir in the VPF account.

How does Voluntary Provident Fund work?

Investments in the VPF are usually made with long-term financial goals in mind. The focus of such plans is mainly towards retirement. This scheme also lets you earn interest while making such savings. Given below are the steps required and a few other important points to remember while opting for such a scheme: 

  1. The employee has to ask their employer for further deduction in their salary. This has to be done in written and submitted to their respective HR or accounting team. 
  2. A VPF form is to be filled which would require personal details of the employee and has to be submitted to the employer. 
  3. The form would require details such as the details of the amount which is to be contributed monthly from Basic Salary and DA.
  4. The interest rate on the VPF is 8.65%. Any interest rate offered above this amount would be taxable. 
  5. If the money is withdrawn prior to the maturity date of the scheme, the interest earned becomes taxable. 
  6. This scheme can only be availed by salaried professionals. 
  7. The interest rate offered on the PF or the VPF changes every financial year. 

Tax Benefits available under VPF

Voluntary Provident Fund is considered one of the best investment instruments that an individual can consider investing in. With respect to the tax benefits, under section 80C the employees can claim deductions up to INR 1,50,000. In addition to this, the interest that is generated from these contributions is also exempt from taxes provided that the interest rate is not more than 9.05% per annum.

Documents Required to Open a VPF Account

Below mentioned are the documents that are required to open a VPF account:

  • An employee needs to submit the company registration certificate with the Ministery of Finance (MoF)
  • Form 49 and Form 24 needs to be filled and submitted
  • Registration Certificate of the company must be submitted
  • In detail company profile must be given
  • If the organisation is an ‘Sdn Bhd’, then the article and memorandum of association must also be submitted

VPF Withdrawal Process

The investors can withdraw the money completely or partially at any point in time. However, any funds that are withdrawn before the minimum period of 5 years will be subject to taxation. No tax will be applicable if the funds are withdrawn after 5 years.

Form 31 needs to be filled out in order to withdraw the amount from the account and this can be done by using the help of the HR/accounting team in the company or can be done online. Document such as bank details, cancelled cheque, PF number and postal address needs to be submitted. One can do so by logging in using their UAN (Universal Account Number). The funds will then be directly transferred to their accounts.

One can withdraw from their VPF account in unforeseen circumstances like financial crisis, medical emergencies, for the higher education of children or even for new house property/land.

The maturity amount will be paid to the employee at the time of resignation or retirement. Moreover, in case of the sudden death of the account holder, the nominee gets the possession of the accumulated amount of the VPF holder. The amount from VPF can also be partially withdrawn pre-maturely as loans.

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Benefits of Voluntary Provident Fund

The three major tax benefits of this scheme are that it is exempted from:

  1. Contribution
  2. The principal
  3. Interest

Along with the above mentioned 3 tax benefits, there are other benefits that are mentioned below:

  1. An employee can contribute up to 100% of their total basic salary and dearness allowance.
  2. This investment is done via the pre-tax income of the taxpayer.
  3. The income earned on the interest is non-taxable given the interest rate is not above 8.65%.
  4. The return on such an investment is also tax-free given the funds are not pre-maturely withdrawn.
  5. The process to avail yourself of such a scheme is hassle-free as the only requirement in terms of paperwork is the VPF account registration form.
  6. The funds can be withdrawn at the time of resignation or retirement from the current employer.
  7. VPF accounts are easily transferrable which is very helpful in case there is a change in job.
  8. In the case of an untimely death of the account holder, the investment will be paid to the nominee or the legal heir.

Comparison between VPF, PPF and EPF

Parameters VPF PPF EPF
Eligibility Criteria Employed Indian  Any Indian citizen Employed Indian
Contribution  Up to 100% Minimum contribution INR 500 and the maximum amount is INR 1.5 Lakh 12%
Taxability on Maturity None None None
Maturity Period Retire/Resign 15 Years Retire/Resign
Tax Benefits Up to INR 1 Lakh a year Up to INR 1.5 Lakh a year Up to INR 1 Lakh a year
Interest Applicable 8.5% P.A. 7.1% P.A. 8.5% P.A.

FAQs

How much can I contribute to VPF?

An Individual can contribute his/her 100% of the salary to VPF.

Can I stop my VPF contribution?

You can stop your contributions at any time. However, bear in mind that amount withdrawal prior to the completion of 5 years will be taxed.

Can the contribution to VPF be changed?

Yes, the contribution to a VPF can be changed. To change your VPF contribution you would have to ask your HR team, or accounting team to raise a request for the addition of a VPF account.

How much amount can I withdraw as loan from a VPF account?

An account holder can make a full or partial withdrawal from the accumulated amount in the VPF account. One has to note that if such withdrawal has been made before the completion of 5 years of existence then the accumulated funds are subject to taxation.

Will there be an effect on my VPF account if I change jobs?

As the VPF account is linked with the Aadhar Card it is quite easy to transfer the VPF account from one employer to the other.

How can one convert an EPF account to VPF account?

The process to convert an EPF account to VPF account is very simple. All one needs to do is inform the employer regarding opening a VPF account and mention the amount that he/she will be contributing to the account.

Dearness Allowance (DA): Rules, Exemptions, and Calculations

What is the Dearness Allowance?

Dearness Allowance (DA) is an allowance paid to meet the cost of living. It helps to offsets the impact of inflation. It varies from employee to employee based on their presence in the urban, semi-urban or rural area. DA is only paid to:

  • Central Government Employees,
  • Public Sector Employees,
  • Pensioners of Central Government.

The allowance is decided by the Pay Commission in India. The pay commission must evaluate and change the salaries of central/public sector employees based on the various components that make up the final salary of an employee. 

Dearness Allowance increased by 5% from 12% to 17% from July 2019. Nearly 50 lakh government employees and 65 lakh pensioners will be benefited from this hike.
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Dearness Allowance increased by 5% from 12% to 17% from July 2019. Nearly 50 lakh government employees and 65 lakh pensioners will be benefited from this hike.

Types of Dearness Allowance

It is broadly categorised in the following two types:

  • Industrial DA (IDA)
    • It is applicable to Public Sector employees. It is revised quarterly depending on the rising levels of inflation.
  • Variable DA (VDA)
    • It is applicable to Central Government employees. It is revised on a half-yearly basis depending on the rising levels of inflation.

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How to Calculate Dearness Allowance?

It is calculated at a fixed percentage of Basic Salary. It is directly related to the employee’s location. The consumer price index in India is provided for the urban sector, semi-urban sector, and rural sector. Hence DA will be different for employees working in each of these sectors. DA is calculated as per the following formula:

For the Central Government Employees

DA % = [(Average of AICPI(Base year 2001=100) for the past 12 months – 115.76)/115.76]*100

AICPI means All India Consumer Price Index.

For the Public Sector Employees

DA % = [(Average of AICPI(Base year 2001=100) for the past 12 months – 126.33)/126.33]*100

Role of Pay Commissions to Calculate Dearness Allowance

The pay commission must evaluate and change the salaries of public sector employees based on the various components that make up the final salary of an employee. Therefore, DA is also considered by the Pay Commissions while preparing the subsequent pay commission report.

It is the responsibility of the pay commissions to take into account every factor that helps with the calculation of the salaries. This also includes the periodic reviewing and updating of the multiplication factor for the calculation of the Dearness Allowance.

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Taxability of Dearness Allowance

It is fully taxable in the hands of the employees. It is added to the salary of employee u/s 17(1) of the Income Tax Act. A taxpayer can file ITR 1 if he/she only has a salary income up to INR 50,00,000.

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Dearness Allowance for Pensioners

Pensioners are the retired employees of the central government. They are eligible for individual pension or family pension. The pension also gets revised every time the Pay Commission rolls out a new salary structure. Pensioners DA is calculated on the Basic Pension.

Dearness Allowance Changes as per Budget 2018

There are roughly more than 50-lakh central government employees who receive the salary from the government. Then there are another 55-lakh retired central government employees who are eligible for a pension. As per the recent announcement by the central Government in Budget 2018, the Dearness Allowance was hiked by 2%.This came as a significant relief for all these beneficiaries as their Dearness Allowance was enhanced from 5% to 7%. These changes are going to significantly benefit all the employees and pensioners of the Central Government.

FAQs

Is Dearness Allowance applicable to the employees and pensioners of the private sector?

No. It is not applicable to the employees/ pensioners of the private sector.

Is Dearness Allowance granted to pensioners who stay abroad?

Pensioners who are staying abroad without re-employment are allowed to receive DA on pension. But DA is not allowed to pensioners who are re-employed abroad.

Does Dearness Allowance differ on the basis of work location of an employee?

Yes, D.A. differs for the employees depending on their work location. Since D.A. is directly connected to the cost of living, it is not the same for all employees and varies for employees working in rural, urban, and semi-urban areas.

When is Dearness Allowance merged with the basic salary of an employee?

D.A. is merged with the basic salary of an employee when it exceeds the limit of 50%. This merging results in a significant hike in the salary of the employees. Currently, D.A. stands at 50% of the basic salary of an employee.