Provident Funds (PFs) are government-backed investment options that are great avenues for long term wealth creation. As per Section 6 of the Provident Fund Act, if an employee so desires, he/she can make provident fund contribution in excess of the statutory rate subject to the condition that the employer shall not be under an obligation to pay any contribution over and above its contribution payable under the law. Thus, an employee can make Voluntary Provident Find (VPF) contributions at any time while he/she is a contributory member of Employees’ Provident Fund (EPF). The Voluntary Provident Fund (VPF) is one of the most convenient avenues for the creation of substantial retirement funds.
However, like any other formal savings scheme, the Voluntary Provident Fund is subject to VPF rules that govern its various facets. Let us learn more about VPF in this article.
When you compare different saving option / government saving scheme for the period October 2020 to December 2020, none of the scheme offers interest rate as high as VPF
What is the VPF?
VPF is the voluntary fund contribution from the employee towards their provident fund account. This contribution is beyond the 12% of contribution by an employee towards his EPF. The maximum contribution is up to 100% of his Basic Salary and Dearness Allowance.
What is the interest earned on VPF?
Interest on VPF is earned at the same rate as the EPF. The interest rate of Voluntary Retirement Plan is decided by the Government of India at the start of each financial year. Currently, the interest is accrued at 8.5% per annum under this scheme.
How is the application under VPF to be made?
The process to open a VPF account is very simple. Employees can contact their employer’s HR team and request them to open a VPF account for additional deduction from the salary by submitting the registration form. The VPF application form captures basic details of the employees with the instruction to debit a particular percentage of the amount from the basic salary and dearness allowance per month as VPF contribution. Additionally, it is mandatory for the Employer to get registered with the EPFO office in order to provide the EPF & VPF facilities to its concerned employees.
The current EPF account will act as the VPF account as well. The below-mentioned documents must be submitted in order for employees to open a VPF account:
- The company registration certificate with the Ministry of Finance (MoF) must be submitted.
- Form 24 and Form 49 must be submitted.
- The company profile in details must be given.
- In case of ‘Sdn Bhd’- MOA & AOA
- The business registration certificate must be submitted.
Employees can check with their employer if any further documents need to be submitted to open a VPF account.
Is there any obligation to contribute to the VPF?
The VPF option is available only to salaried individuals who receive their monthly payments through a specific salary account. However, employers as well as employees are under no obligation to contribute to the employees’ VPF portfolio.
Does VPF have any lock in period?
The maturity term or lock-in period is for 5 years. Once the contribution is chosen in VPF, the same cannot be terminated or discontinued before the base tenure of 5 years completed.
What tax benefits are available under VPF?
The VPF falls under the EEE category. EEE stands for Exempt-Exempt-Exempt and specifies three kinds of exemptions.
- Exempt 1 means that an investment qualifies for deduction.
- Exempt 2 means that the interest earned on the investments is also exempted.
- Exempt 3 implies that the income generated from an investment is also not taxed during withdrawal.
The Employees’ contributions are entitled to deduction under section 80C of IT Act, 1961, subject to the maximum cap of Rs.1.5 lakhs. The interest income is non-taxable until the interest rate exceeds 8.50%. The Redemption is also tax-free until and unless the same is not withdrawn prior to the maturity period of 5 years
Can the VPF account be transferred?
The transfer process under VPF is very simple. The VPF account can be transferred from one employer to another upon changing jobs.
VPF allows partial withdrawals as loans with also the possibility of complete withdrawals. If the withdrawal happens before the 5-year minimum tenure, then tax will be applicable on the accumulated maturity amount.
The accumulated money can be withdrawn at any given time. In case of an unforeseen financial emergency, one can always fall back to his VPF account. The account can be broken for many reasons which include:
- Payments of medical bills
- Cost-intensive events like higher education and marriage
- Payments for house construction or purchase of new land/house
What is the process of withdrawal from a VPF account?
Employees must fill up Form-31 and give a request letter in writing for VPF withdrawal. Employees will be able to get the Form 31 from their employer’s Human Resource (HR) team or on the government’s portal. All required documents, including the details of the employee such as PF number, postal address, and bank details must be submitted. A cancelled cheque must also be submitted. All documents that are submitted must be self-attested.
When the is maturity amount of VPF paid?
Once the employee resigns or retires from the employment the final maturity amount is paid to him. At the time of the untimely death of the account holder, the nominee can get the possession of the accumulated fund in the VPF account.
How is VPF contribution reflected in provident fund passbook of an employee? Will an employee receive interest at the notified rate on the VPF?
The VPF contribution will be reflected in the same EPF account. No additional account will be opened for the VPF contribution. The EPF passbook will show the statutory contribution by the individual clubbed with VPF contribution made by the individual and employer’s contribution.
Investments towards a VPF account is viable because of its high rate of interest and tax benefits. Since the scheme is regulated by the Indian Government, there are no risks involved in investing in the scheme. Compared to other long-term investment options offered by private organisations, it is very safe to invest in a VPF account. If you are looking for a long-term investment option with high returns and low risk factor, you can surely opt for the VPF.