What is a Voluntary Provident Fund?
A Voluntary Provident Fund is a contribution that one makes towards their provident fund account over their Employee Provident Fund contribution. This a scheme made specifically for salaried employees who wish to add to their provident fund. VPF is basically an extension of the Employee Provident Fund.
This contribution is made beyond the 12% of the contribution made by an employee towards their Employee Provident Fund. 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 with 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. In such a scenario, the employers are under no obligation to contribute to the VPF of their employees.
Features of the Scheme
- Employees can contribute 100% of their salary to the VPF account.
- 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)
- The employees are not obligated to enroll themselves in this scheme and can do so only if they wish to.
- They can enroll themselves in the VPF accounts at any time during the Financial Year.
- The minimum time period or maturity term for this scheme is of 5 years and the investments cannot be withdrawn before the tenure is completed.
- The interest rates are regulated by the government of India and are announced in the annual budget of every financial year.
- 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.
- The employee is entitled to the final maturity amount at the time of resignation or retirement from employment.
- 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:
- 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.
- A VPF form is to be filled which would require personal details of the employee and has to be submitted to the employer.
- The form would require details such as the details of the amount which is to be contributed monthly from Basic Salary and DA.
- The interest rate on the VPF is 8.65%. Any interest rate offered above this amount would be taxable.
- If the money is withdrawn prior to the maturity date of the scheme, the interest earned becomes taxable.
- This scheme can only be availed by salaried professionals.
- The interest rate offered on the PF or the VPF changes every financial year.
The 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 invite tax deductions. No tax will be applicable if the funds are withdrawn after 5 years.
The amount can be withdrawn by using the help of the HR/accounting team in the company or can be done online. One can do so by logging in using their UAN (Universal Account Number). The funds will then be directly transferred to their accounts.
The maturity amount will be paid to the employee at the time resignation or retirement. The funds can also be partially withdrawn pre-maturely as loans.
Benefits of Voluntary Provident Fund
The three major tax benefits of this scheme are that it is exempted from:
- The principal
Along with the above mentioned 3 tax benefits, there are other benefits that are mentioned below:
- An employee can contribute up to 100% of their total basic salary and dearness allowance.
- This investment is done via the pre-tax income of the taxpayer.
- The income earned on the interest is non-taxable given the interest rate is not above 8.65%.
- The return on such an investment is also tax-free given the funds are not pre-maturely withdrawn.
- 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.
- The funds can be withdrawn at the time of resignation or retirement from the current employer.
- VPF accounts are easily transferrable which is very helpful in case there is a change in job.
- In the case of an untimely death of the account holder, the investment will be paid to the nominee or the legal heir.
An Individual can contribute his/her 100% of the salary to VPF.
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.
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.