Overview about Voluntary Provident Fund (VPF)
As the name clearly defines, Voluntary Provident Fund is a version of the traditional provident fund saving scheme wherein the subscriber retains the control to periodically assign a specific amount to his/her provident fund, voluntarily, as part of his/her VPF contribution. Aside from being an excellent tax saving option, voluntary PF will help the subscriber amass a sizable savings portfolio and provide a long term savings option for those big life milestones or other planned financial contingencies. In recent times, Voluntary Provident Fund in India has proved to be quite a popular savings instrument, especially amongst the employed sections of the society.
The voluntary provident fund scheme is an extension of the Employee Provident Fund (EPF) wherein the applicants can invest above the 12% contribution factor that applies to their traditional EPF accounts. The voluntary PF option applies exclusively to salaried individuals who receive their monthly pay through a designated salary account. People working in the unorganized sectors including non-salaried employees can open a PPF(Public Provident Fund) account at a local bank or post office.
The interest rate applicable to voluntary PF accounts is decided for each financial year by the government of India. Currently, the voluntary provident fund interest rate is set at 8.80%. Combined with the fact that monies accumulated in the vpf account is eligible for tax deduction under section 80C of Income tax act, the impressive interest rate adds to the allure and is prompting more and more Indians to seriously consider the VPF contribution route.
- Safe Investment Option- Voluntary Provident Fund scheme is offered and managed by the Government of India. Thus, this is deemed as a safe and trustworthy investment medium minus the risk that is usually associated with long term investment plans as offered by private players.
- Simple to Apply-All you must do is raise a request with your payroll/finance/HR team with regards to the opening of the VPF account. This can be done with a simple Voluntary Provident Fund Registration form and immediately after, your EPF account will serve as the new VPF account. Additionally, the account can be opened at any time through the financial year, though the start of the year is the rank favorite for obvious tax saving purposes.
- High Rate of Interest-Traditionally, VPF accounts are known for their high yield. Currently, the rate of interest stands at 8.75%, which is still an impressive number.
- Potent Pension Fund-Amount invested in VPF can be withdrawn at retirement or resignation from current employment. Hence, these funds act as long term investments that come in handy when regular monthly income isn’t available.
- Tax Savings-Employee’s contribution to the VPF account is eligible for deduction when accounting for tax, to the tune of Rs.1 lakh. The income generated through interest is not taxable, provided the monies derived isn’t in excess of the base interest rate of 9.50%. The accumulated amount, if withdrawn before the account completes 5 years, is subject to taxation.
- Easily Transferable- Your VPF account can be easily transferred from one employer to the next. Thus, change of jobs isn’t going to impact the benefits that are likely from your regular VPF Also, upon your untimely demise, the accumulated monies will be seamlessly transferred to the nominee as nominated by you or your legal heir.
When indulging in any long term savings/investment plan, the curiosity with regards to the sheer quantum of the final monetary output, and how to actually get there, is always a strong motivation in the back of a resourceful investor’s mind. Simple online tools such as the Voluntary Provident Fund Calculator help make such calculations easier, allowing said investor the basic knowledge of how much money must be periodically invested to attain the planned target payout. The standard VPF calculator utilises the following input points to flesh out your voluntary PF payment strategy-
- Base Monthly Salary
- % of Salary to be Contributed to VPF Account
- Monthly Contribution to Employee Provident Fund (EPF)
- Employer’s Contribution to your EPF Account
- Current EPF Balance
- Applicable Interest Rate
In theory, there isn’t a specific registration form to apply for the Voluntary Provident Fund account. An employee who is interested to invest in a VPF account must intimate the same to his/her payroll team and the latter will convert the applicant’s EPF account into a VPF account. However, in order for this to happen, the concerned employer must be registered with the Employees’ Provident Fund Organization of India. The employer must fill up a Business Establishment Registration Form that will be processed and acted upon by the aforementioned EPF Office. Post this, the employer can participate in the EPF routine and consequently the concerned employees can request for the opening of a Voluntary Provident Fund account. The various steps involved in this process are as follows-
- Employee requests the employer for additional deductions from his/her salary in favor of the voluntary PF account. This can be done at any time through the financial year.
- The employee must fill up a basic KYC form, sign it appropriately and forward the same to the payroll/finance/HR department of his/her company.
- Upon reception of this form, the company’s payroll team will confirm upon the accuracy of the supplied details and graduate the employee’s basic EPF account into the requested voluntary PF account. Thereafter, the stipulated percentage as mentioned by the employee will be deducted from his/her monthly salary as the vpf contribution.
The basic format of the voluntary Provident Fund form must include the following details-
- Date from when EPF contributions are being made.
- Status as not an ‘excluded’ employee as stipulated in the Para 2 (f) of the EPF Scheme, 1952.
- Percentage of salary that is permitted to be deducted as contribution to the vpf account. Also, date from when this will be applicable.
When speaking of effective financial tools/investments that save tax in India, the Voluntary Provident Fund Scheme is given its due credit. According to the latest regulations, the investor can enjoy a tax break of upto Rs.1 lakh as stipulated by Section 80C of the Indian Income Tax Act. However, note that all investments to the VPF account are considered from the employee’s pre-tax income. Further, the income derived as interest amount from the VPF isn’t taxed unless said interest rate exceeds or matches upto 9.50%. Also, if the applicant decides to terminate his/her account before the stipulated 5 years tenure then tax will apply, otherwise the withdrawal is deemed tax free.
The Indian government views the Voluntary Provident Fund in India as a robust investment option that benefits the employed class of people- a segment of the population that has the buying power, financial foresight and propensity to create long term plans. This is also the segment that could greatly benefit from an investment option that is seamless, safe and involves very limited input of time and energy. In return, the applicant enjoys the perks of a robust pension fund, a medium term savings instrument that can mature in time for a long planned financial requirement or simply, a systematic investment plan that involves very little risk as compared to the other options available in the Indian market. Plus, there is the added attraction of a high interest rate and easy management. No wonder that voluntary provident fund in India has risen up to be a popular choice amongst the employed sections of the population.
Applying for the voluntary PF account is simple, and the associated regulations are easy to follow. The following list talks about the various rules and regulations governing the Voluntary Provident Fund scheme in India-
- Employee can contribute as much as 100% of his/her salary towards the VPF Account. This contrasts with the EPF account wherein he/she can contribute a maximum of 12% of his/her basic salary.
- VPF is a subset of the Employee Provident Fund (EPF) wherein the only differentiating factor is the percentage of contribution that the concerned employee can appoint, as compared to the fixed 12% that applies to the EPF account. There is no separate account for VPF.
- Only salaried employees, working for organizations recognized by the Employees’ Provident Fund Organization of India, can open and maintain a VPF Account. Self-employed individuals and people working in the unorganized sectors cannot open VPF Accounts.
- Employers are under no obligation to contribute to their employees’ VPF portfolio.
- VPF Accounts can be opened at any time through the financial year. However, investments to the same cannot be terminated/discontinued before the base tenure of 5 years is completed.
- It’s always a good option to start a voluntary provident fund account at the start of the financial year as this helps in better financial planning and tax savings. The onus lies with the concerned employee to affect this by intimating his/her employer about the same.
- Applicants must also note that the VPF account interest rates are decided at the start of the financial year by the Government. The rates can either increment or decrement as compared to the earlier years. Thus, all applicants must pay due attention to the VPF interest rate that applies for that particular financial year before signing on the dotted lines.
- Speaking in terms of the 2015-16 scene, if the Indian Government’s ambitious Direct Taxes Code (DTC) comes into effect, then the entire VPF amount at maturity is liable to be taxed. FYI- DTC is a proposed regulation from the Indian Government that intends to simplify the direct tax laws that are currently prevalent in India. The final aim is a single rule that is derived after the study, simplification and revision of the direct tax laws in India.
- VPF accounts allow partial withdrawals as loans, with also the possibility of complete withdrawals. If said withdrawal happens before the account has completed 5 years of existence then tax will be applicable on the accumulated maturity amount.
- The final maturity amount is payable at the time of retirement or resignation from employment. The amount can also be transferred from one employer to another (just as in the case of EPF accounts) and upon the untimely death of the account holder, the assigned nominee/legal heir will gain possession of the accumulated balance in the voluntary PF account.
As mentioned earlier, the VPF account is the subset of the Employee Provident Fund (EPF) account and can be applied for by simply forwarding a request to the concerned company’s payroll/finance/HR team. The application form is a basic collection of employee information that directs the concerned payroll team to deduct a specified percentage of monies from the employee’s basic monthly salary as vpf contribution.
In terms of the bigger picture, the employer must register with the Employees’ Provident Fund Organization of India to be eligible to offer the EPF facility to its employees and consequently, the VPF option. For registration, the company must produce the following documents-
- Crisply compiled company profile.
- Certificate of Business Registration (Form 9 & Form D).
- Forms 24 & 49.
- MOF- Company Registration Certificate
- If company is a ‘Sdn Bhd’- Memorandum and Articles of Association.
- Other documents as and when required.
Investments under the Voluntary Provident Fund scheme are quite popular, and one of the biggest reasons for this is the fact that the money accumulated in the voluntary pf account can be withdrawn at any time. Yes, there are certain conditions involved, yet, this accumulation of funds can be called to immediate action in case of an unforeseen and pressing financial contingency. A depositor can ‘break’ his/her VPF account for a fixed number of reasons, including-
- Medical treatments involving the account holder and/or his/her family members.
- Cost intensive events such as higher education and marriage.
- For the construction/purchase of house/plot of land.
- Home loan repayments.
Kindly note that terminating your voluntary PF account before said account has completed 5 years of existence will lead to tax deductions on the accumulated funds.
In order to withdraw the funds accumulated in his/her VPF account, the applicant must raise a request in #Form-31# through his/her employer. Form-31 (Application for Advance from the EPF Fund) can be downloaded from the Employees’ Provident Fund Organization of India website. The document includes details about the employee, including full postal address, EPF account number, bank account details where the money will be credited, etc. The document must be properly attested by the concerned employer.
A) Who are ideal candidates for a VPF account?
Anyone who is looking to invest in a long term financial instrument is an ideal candidate. VPF accounts are best suited for people who are nearing retirement and/or are looking out for a robust, safe and scalable pension fund option.
B) What is the maximum and minimum amount that can be invested in VPF?
When it comes to the voluntary provident fund scheme, there isn’t a maximum or minimum limit as the same is decided by your individual monthly contributions. You can earmark as much as 100% of your monthly income (salary + dearness allowance) as VPF contribution. Note that your employer isn’t obligated to contribute to your VPF account. Hence, the money accumulated in your voluntary PF account is directly dependent on your monthly contributions and the interest accumulated by the same over the tenure of the investment.
C) How much amount can I withdraw as loan against my VPF account?
Partial withdrawals are possible as also the complete withdrawal of the monies accumulated in the VPF account. Usually, people who are changing jobs are prone to breaking their voluntary pf accounts and accessing the funds. However, note that if such an action is completed before said account has completed 5 years of existence, the accumulated funds are subject to taxation.
D) What’s the difference between PF, EPF and VPF?
The following table summarizes the differences between these three popular investment types,
|Who can open account?||Any Indian (No NRIs)||Employed Indian||Employed Indian|
|Employee Contribution||N.A||12%||Upto 100%|
|Tax on Maturity||None||None||None|
|Tax Benefits||Upto Rs.1 lakh/year||Upto Rs.1 lakh/year||Upto Rs.1 lakh/year|
|Investment Tenure||15 years||Retirement/ Resignation||Retirement/ Resignation|
|Quantum of Loan||Post 6 years, 50% withdrawal||Can avail partial withdrawals||Can avail partial withdrawals|