What is Voluntary Provident Fund?Voluntary provident fund (VPF) or Voluntary Retirement Fund (VRF) is the investment option that you can choose to make voluntarily. If you are a salaried employee of an organisation receiving a monthly payment in a salary account and contributing towards employee provident fund you avail of the VRF facility voluntarily. However, once you chose to contribute towards the VPF, you cannot discontinue your contribution before the completion of the base tenure of five years.
Contribution towards Voluntary Provident FundAny contribution you make towards the VPF is over and above the mandatory 12% contribution towards the EPF. You can make a maximum contribution of 100% of basic salary and dearness allowance towards the VRF. The interest on the VPF, however, remains the same as the EPF. The interest on the VRF can thus rightly be called an extension of the EPF, thus an EPF account is mandatory to invest in VPF.
Who can invest in Voluntary Provident Fund?If you are a salaried employee seeking a safe and seamless investment option, then the VPF can be an ideal investment tool for you. By investing in VPF, you have the opportunity to achieve some long term financial goals through regular monthly contributions.
Now let us look at some benefits that investment in VPF offers in some more details:
Benefits of Voluntary Provident FundSovereign guarantee
Like we mentioned before, the VPF is an extension of the EPF. This essentially means that it is safe investment option managed with the guarantee of the Government of India. The rate of interest is fixed each year by the Government. A VPF investment may thus be considered a risk free investment option compared to any long-term investment option that is available in the private sector.
Easy application process
It is fairly easy to open a VPF account. All you have to do is approach the HR or the accounts team of your organisation and make a request to make a VPF contribution. All you need to do is fill out a registration form available with your organisation. Once the registration process is complete, your EPF account serves as your VPF account.
The interest on the EPF (and thus the VPF) is reviewed and announced at the beginning of each financial year by the Government of India. Currently, the rate of interest on the EPF (consequently the VPF) is 8.65%. Contribution towards the VPF is thus more feasible than making your money lie idle in a savings account.
Like the EPF, the VPF enjoys the EEE or exemption, exemption, exemption status. This means contribution, interest accumulation and final accrual is tax free in your hands. Further, you are entitled to tax benefits under Section 80C of the Income Tax Act by making a contribution to the VPF. This is however subject to a cap of Rs1.5 lakhs.
Easy transfer and withdrawal
Upon changing your job, you can easily transfer your VPF from one employer to another. You need to follow the standard procedure of EPF transfer for this. As for withdrawal, the VPF provides several options. You can take a loan against your VPF, make a partial withdrawal or a complete withdrawal, any time after the completion of the base tenure of 5 years. You can make a partial withdrawal or take a loan against your VPF account for any of the following reasons:
- In the event of a medical emergency of self or nearest kin
- Higher education or wedding of your children
- Fund requirement for purchase or construction of your house
If you choose to make a full withdrawal before the completion of the five-year tenure, tax will be applicable on the accumulated maturity amount. However, if you resign or retire from your current organisation, you are entitled to the full maturity amount that is tax free in your hands. If case of your demise, your nominee is entitled to possession of the maturity proceeds that you have made.
Who should consider a VPF contribution?Given the high returns of 8.65%, the VPF as an investment option, has indeed caught the attention of salaried employees. But should you consider making a contribution to VPF? Here is the answer.
If you are young and have just begun your career, making a larger contribution towards VPF may not be a great option for you. The younger you are the more risks you can take. Thus, making a contribution towards equities either directly or through the mutual fund route would fetch you higher returns. This is considering that long term savings are your primary concern.
On the other hand, if you are approaching retirement and are at the fag end of your career, contributing towards the VPF may be a good option. This is because it provides the ideal scope to tone down your equity investments and move into the fixed income category at reasonably high rate of interest that is completely safe from market risk. Thus, if rounding up your nest egg is your priority, VPF is just the easy investment option you can consider.