What is a Voluntary Provident Fund?
A Voluntary Provident Fund 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. VPF 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 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- The minimum time period or maturity term for this scheme is of 5 years and the investments cannot be withdrawn before the tenure is completed.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.
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 in order 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
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 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 VPF 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.
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.
Comparison between VPF, PPF and 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.|
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.
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.
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.
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.