Throughout your work life, one of your main financial goals is to secure your retirement. In order to achieve this goal, you plan your savings through investments. While a lot of these investment schemes come with potential risks, there are a few that are government-backed and safer to invest in.
Provident Fund (PF) and Voluntary Provident Fund (VPF) are both such government-backed and managed saving schemes that are specifically created for salaried employees. With provident fund (PF) you have to mandatorily invest 12% of your salary while with Voluntary Provident Fund (VPF) the contributions you make are voluntary.
Many previous studies and experts claim that Voluntary Provident Fund (VPF) is a better option of investment. Through this article we will take a brief look at both PF and VPF, focusing more on VPF and why you should opt for VPF investment.
What is a Provident Fund (PF)?
Provident Fund (PF) is a savings scheme for salaried employees. Every month a part of the employee’s salary goes into the Provident Fund which is given to the employee either at the time of retirement or when they exit the employment.
You are not required to pay any tax on this Provident Fund if you withdraw the Provident Fund amount after more than 5 years of employment. Provident Fund is also a great way to save a good amount of your money through your earning years which can be then either withdrawn or invested to gain more returns after your retirement.
One of the biggest benefits of investing in a PF is that you can earn monthly interest which is compounded and grows into a bigger sum for your post-retirement income. This helps a great deal to secure your post retirement life and to meet your further financial goals.
What is a Voluntary Provident Fund (VPF)?
Voluntary Provident Fund (VPF) is an extended version of the Employees Provident Fund (EPF). Through a voluntary Provident Fund your contributions as an employee to your PF accounts are voluntary and can be more than the 12% that are made through the Employees’ Provident Fund scheme.
The percentage of contributions made through the Voluntary Provident Fund (VPF) is not decided and depends on your choice with the maximum contribution being 100% of your salary with dearness allowance. Neither the employer nor the employee is under any obligation to make contributions to the VPF account.
The interest on your VPF account is similar to that offered on your provident fund. As of 2021, the interest is 8.5%. Once you make a contribution to the VPF account, it will be the same for 5 years which is the tenure period for the voluntary provident fund account.
As we discussed above, VPF is an extension to EPF so the contributions are deposited in the same amounts. This means the lock in period for both these accounts is the same.
VPF interest rates 2023
The table below shows interest rate applicable on VPF as of 2023:
|Tenure||Maximum up to retirement or resignation|
|Investment amount||Flexible as per employee’s preference|
|Maturity value||As per the investment made|
Why should you opt for VPF?
When you invest in VPF, you can invest as much of your money through a single scheme which is risk free and safe to secure your finances and your post retirement life. By investing in a Voluntary Provident Fund you can enjoy higher returns.
Voluntary Provident Fund is a great tax saving scheme as it is exempt on contribution, exempt from principal and exempt on interest. This helps you to save a significant amount of money and achieve your long term and short term financial goals.
Apart from this, there are a number of other benefits that come with investing in VPF.
Benefits of Voluntary Provident Fund (VPF):
- Opening a VPF account is much easier than other investment accounts like Public Provident Fund (PPF). As VPF is an extension of an employee’s provident fund, all you need to do is inform your employer that you want to make higher contributions to your Provident Fund. By doing so your existing Provident Fund account will act as your additional VPF account. All you need to do is fill out a registration form and submit it to your finance department.
- Voluntary Provident Fund accounts can be easily transferred across jobs. This means when you switch jobs, this account can be easily transferred from one employer to another.
- Voluntary Provident Fund offers you higher returns at a rate as high as 8.5% per annum. This scheme also has tax benefits as contributions upto 1.5 lakhs per annum are not taxable.
- As a Voluntary Provident Fund (VPF) is managed by the government, it is one of the safest investment options and is great for those who want to invest their money without facing any risks.
- There is also an additional benefit; through VPF you can withdraw your accumulated amount anytime. So this makes VPF not just a post retirement security investment but also a good investment to meet your short term goals. Also this means, the accumulated money can be used in case of emergencies.
Who should invest in VPF?
VPF investments are well-suited for individuals who are seeking a long-term investment opportunity. These accounts are ideal for those nearing retirement age who desire a secure, reliable, and growing pension fund option.
PF Vs VPF
The table below shows the key differences between PF and VPF:
|Feature||Provident Fund (PF)||Voluntary Provident Fund (VPF)|
|Nature of Contribution||Provident Fund contributions are mandatory for employees earning below a certain salary.||Voluntary Provident Fund contributions are optional for employees.|
|Eligibility||Only employees earning below a certain salary are eligible for Provident Fund contributions.||All employees are eligible for Voluntary Provident Fund contributions.|
|Employer Contribution||Employers are required by law to make Provident Fund contributions for their employees.||Employers have the option to make Voluntary Provident Fund contributions for their employees.|
|Employee Contribution||Employees are required by law to make Provident Fund contributions from their salary.||Employees have the option to make voluntary contributions to their Voluntary Provident Fund account, and can contribute an amount higher than the required amount.|
|Interest Rate||The interest rate for Provident Funds is determined by the government.||The interest rate for Voluntary Provident Funds is the same as for Provident Funds.|
|Withdrawal||Withdrawals from Provident Funds are limited to specific conditions such as retirement or termination of employment.||Withdrawals from Voluntary Provident Funds are similar to those from Provident Funds, but with more flexibility.|
|Tax Benefits||Provident Fund contributions are tax deductible up to a certain limit.||Voluntary Provident Fund contributions are also tax deductible up to a certain limit.|
So, to conclude, a Voluntary Provident Fund (VPF) is a great investment option to secure your post retirement life and to meet your short term and long term financial goals with minimal or no risks. If you are a salaried employee, having a VPF account will mean investing your money in a trusted scheme while gaining higher returns and securing your finances for a better and well planned future.
With a Voluntary Provident Fund, you can contribute any percentage of your salary to your VPF account. A VPF account falls under the EEE category meaning it is exempt on contribution, exempt from principal and exempt on interest. This makes it a great investment for saving taxes.
Any salaried employee with an existing employees’ provident fund (EPF) account is eligible to have a Voluntary Provident Fund (VPF) account.
Through Employees’ Provident Fund (EPF) you mandatorily have to contribute 12% of your salary to your provident fund account. Whereas, through Voluntary Provident Fund (VPF) you can contribute any percentage of your salary voluntarily to your account.