Voluntary Provident Fund (VPF)
Voluntary Provident Fund - Meaning, Benefits, and Eligibility
Perhaps no similar-sounding terms confuse investors as much as VPF, EPF, and PPF. VPF stands for Voluntary Provident Fund. EPF stands for Employee Provident Fund, and PPF means Public Provident Fund.
While all three terms are related to investment and long-term financial planning, not all provide similar benefits or features. Besides explaining the meaning, benefits, and eligibility of VPF, or the Voluntary Provident Fund, this article also elaborates on the differences between VPF, EPF, and PPF.
What is VPF?
VPF is the acronym for Voluntary Provident Fund. It is also known as the Voluntary Retirement Fund since the primary purpose of this fund is to let investors create a corpus for retirement. The Government of India backs VPF. VPF interest rates are typically higher than most secure investment options and carry almost no risk.
A Voluntary Provident Fund is a scheme in which employees or depositors can deposit a significant amount as a voluntary contribution. Any employee or depositor wishing to be part of the VPF scheme may regularly invest some of their income in the fund to reap rich dividends.
The fundamental requirement to maintain a VPF account is that the employee’s contribution to VPF must be higher than their EPF contribution. So, if an employee contributes 12% of their basic salary and DA (Dearness Allowance) to EPF, their VPF contribution must be more than 12% of the EPF contribution amount. The best thing about VPF is that you can put as much money into it as you want.
Differences Between VPF, EPF, and PPF
- EPF - EPF, or Employee Provident Fund, has been designed by the Indian government to provide financial stability to professionals working in various industrial and corporate houses. According to the Miscellaneous Provision Act 1952, any organisation employing more than twenty (20) people must register with the EPFO. EPFO stands for Employees Provident Fund Organisation. It is worth noting that only employees earning less than INR 15,000 a month are eligible for an EPF account. However, suppose an employee’s salary is over INR 15,000 a month, and they wish to participate in the EPF scheme. In that case, they must obtain the consent and permission of their employer and the Assistant Provident Fund Commissioner to register in the scheme. Generally, the employee and the employer contribute 12% of the employee’s basic salary and DA to the EPF account.
- VPF - As mentioned, an employee can contribute voluntarily to a VPF account. However, the VPF contribution amount must be more than the EPF contribution amount. In fact, an employee can also contribute 100% of the basic salary and DA to VPF. But, the employer will not contribute anything. VPF interest rate is the same as the EPF.
- PPF - Unlike EPF and VPF, PPF, or Public Provident Fund, is an open-for-all sovereign savings scheme. This scheme primarily targets self-employed people or those working in the unorganised sector. Although the interest rate of PPF is considerably lower than EPF, the income from PPF is tax-free.
Voluntary Provident Fund - Salient Features
Before understanding the top benefits of VPF, let’s discuss the salient features of the Voluntary Provident Fund:
- Any salaried professional can deposit up to 100% of their basic salary and DA (Dearness Allowance) into their VPF account.
- Salaried professionals do not need to maintain any separate VPF account since Voluntary Provident Fund accounts are linked to the Employee Provident Fund. So, the investment made by an employee in VPF automatically gets credited to their EPF account.
- To avail of the benefits of VPF, a salaried professional must work in an organisation registered with and recognised by the Employees’ Provident Fund Organisation.
- Self-employed professionals or non-professionals and individuals working in unorganised sectors are not eligible for the VPF scheme.
- There is no minimum or maximum investment amount in VPF. However, employees cannot exceed the contribution amount by more than 100% of their basic salary and DA.
- VPF accounts do not allow withdrawals before five (5) years from the date of the first investment. However, the maturity term of VPF is much less than PPF (15 years).
- Investors can withdraw partial or full investment amounts from a VPF account. However, it is wise to understand the tax implications before doing so.
- Investors can receive the VPF maturity amount in full if they retire or resign from their job.
- VPF, like EPF, is transferable from one employer to another. So, salaried professionals can transfer the total funds as often as they want.
Voluntary Provident Fund - The Top Benefits
The following are the top benefits of investing in VPF:
- No Risk - Voluntary Provident Fund scheme is managed by the Employees’ Provident Fund Organisation, which is controlled by the Ministry of Labour and Employment, Government of India. So, there is no investment risk.
- Withdrawal - VPF allows partial or complete withdrawals after five (5) years from the account opening date.
- Tax Deduction - An investor can claim a tax deduction of up to INR 1,50,000 under Section 80C of the Income Tax Act and save taxes of up to INR 46,800 every year.
- No Tax - If the interest exceeds 8.5%, an investor does not have to pay any tax on the accumulated fund in a VPF account.
- Tax-Free after 5 Years - If an investor withdraws funds from their VPF account five (5) years from the investment date, they don’t have to pay any taxes on the income.
- High-Interest Rate - VPF interest rate is much higher than other deposit schemes with a sovereign guarantee, such as PPF, SCSS, MIS, PMVVY, etc.
- Withdraw on Retirement or Resignation - Investors can make VPF withdrawals at the time of resignation or retirement. This makes VPF more liquid than PPF or life insurance schemes.
- Simple Application Process - Salaried professionals can conveniently open VPF accounts. You can fill out the VPF registration form and approach your employer to open the account on your behalf. Since VPF is integrated with EPF, your VPF account number will be the same as your EPF number.
- Transfer Seamlessly - Investors can seamlessly transfer their VPF account from one employer to another if they change jobs.
- Death Benefits - If the investor dies when the VPF account is in operation, the investor’s nominee can claim the accumulated amount in the account.
Voluntary Provident Fund - Eligibility Criteria
The eligibility criteria of the Voluntary Provident Fund are pretty relaxed. Investors fulfilling the following criteria may invest in VPF:
- The investor must work in a company in the organised sector registered with the Employees’ Provident Fund Organisation. According to the Miscellaneous Provision Act 1952, all organisations where more than twenty (20) people work must register with the EPFO.
- The investor must have an active EPF (Employee Provident Fund) account. Generally, an employee earning less than INR 15,000 per month is eligible for EPF accounts. However, if an employee earns more than INR 15,000 every month but still wishes to open an EPF account, they must approach their company’s management and the Assistant Provident Fund Commissioner.
Voluntary Provident Fund - Interest Rate
The Employees’ Provident Fund Organisation fixes VPF interest rates. Here is how the EPFO determines VPF interest rates:
- The EPFO’s topmost decision-making wing is the Central Board of Trustees (CBT). The CBT evaluates many macroeconomic factors to decide the interest rate of VPF and EPF.
- After deciding the interest rate of VPF, the CBT sends the proposal to the Ministry of Finance, Government of India.
- The CBT reviews the revenue generation from EPFO’s investments and the declaration. Generally, the rates are determined based on the prevailing saving schemes’ interest rates.
- Provident Fund Commissioners follow the Central government’s directives regarding interest rates to credit the VPF interest amount.
- The EPFO credits the interest to investors’ accounts based on their running balances (monthly).
Voluntary Provident Fund - Interest Rate Trends
The Government of India determines VPF interest rates in consultation with representatives of the Ministry of Finance and the Employees’ Provident Fund Organisation (CBT). Generally, the government declares the VPF interest rate at the beginning of a financial year. So, employees contributing to VPF can plan their tax payments and deductions well in advance. It is worth noting that VPF interest rates are dynamic since the government changes them every financial year.
The following list contains the current and historical interest rates of EPF and VPF:
|Financial Year||VPF Interest Rate|
Voluntary Provident Fund - Documents Required to Open an Account
You must submit a few documents to open a VPF account and invest conveniently. Here is the comprehensive list of documents you must submit along with your Voluntary Provident Fund registration form:
- The Ministry of Finance provides the company’s Registration Certificate. It is worth noting that only companies registered with and approved by the Ministry of Finance can open VPF accounts.
- Filled out Form 24
- Filled out Form 49
- Employer-provided company profile
- Employer-provided business registration certificate
After your VPF account is opened, your employer will deduct whatever amount you wish to invest directly from your salary and deposit it with the EPFO.
Voluntary Provident Fund (VPF) - Tax Benefits
Since VPF is a part of an employee’s EPF account, the tax benefits of both are the same. Section 80C of the Income Tax Act 1961 allows investors to save taxes of up to INR 1,50,000 every financial year for investing in EPF and VPF. Also, if you do not withdraw any amount from your VPF account before five (5) years, the maturity and interest amount you get becomes exempt from wealth tax.
Voluntary Provident Fund - How to Make Withdrawals
VPF withdrawals are convenient, quick, and hassle-free. You can withdraw money from your VPF account in the event of any medical emergency. Besides medical emergencies, you can also withdraw money from your VPF account under the following circumstances:
- The account holder’s wedding
- The account holder’s higher education
- If the account holder decides to purchase a house or land
- If the account holder decides to construct a house.
If you want to withdraw money from your VPF account, you must fill out the withdrawal request letter and Form-31 and submit them to your employer. The withdrawal request must contain information about your PF account number, postal address, bank account details, and a cancelled cheque.
Voluntary Provident Fund - In a Nutshell
Here are the key facts to know about the EPFO’s Voluntary Provident Fund scheme:
- Employees can register for the VPF scheme if their company is registered with and approved by the Employees’ Provident Fund Organisation (EPFO) to allow VPF account opening.
- Having an EPF (Employee Provident Fund) account is mandatory to open a VPF account.
- Unlike EPF, VPF contributions are not mandatory for investors.
- The government announces the VPF interest rate at the beginning of a financial year.
- Investors can withdraw the complete VPF amount after retirement or resignation.
- Investors can transfer their VPF accounts from one employer to another seamlessly.
- If a VPF account holder dies before retirement, their nominee or legal heir can claim the accumulated amount.
- VPF is only for people working in the organised sector. People working in the unorganised sector can invest in a PPF (Public Provident Fund).
- Investors can avail of loans from their VPF accounts.
- The total withdrawal amount will be taxable if an investor withdraws any amount from their VPF account before five (5) years. However, VPF withdrawals after 5 years are tax-free.
Should You Invest in Voluntary Provident Fund?
Investing in Voluntary Provident Funds comes naturally to some, while others look for better options. Besides providing a higher-than-average 8.1% interest rate per annum, VPF offers a lot of benefits. For instance, any EPF account holder can invest in VPF. Also, you can withdraw your investment amount any time after five years without paying any wealth tax. Additionally, VPF investments are eligible for tax deductions of up to INR 1.5 lakh under Section 80C of the Income Tax Act.
However, despite multiple benefits, VPF is still a conservative investment option. The government fixes VPF interest rates, and you will earn the same amount irrespective of the prevailing market conditions.
Consider investing in debt mutual funds if you want more returns from your hard-earned money without much risk. Bond and liquid mutual funds usually invest in high-quality government bonds, corporate bonds, and money market instruments. Also, a quick scan of the top debt mutual funds shows that the long-term returns from these funds exceed the returns generated by provident fund accounts.
Hence, consider investing in VPF if you want stable, pre-defined returns. But if you want stability and higher-than-VPF returns, investing in debt mutual funds might be a better option.
Frequent Asked Questions (FAQs):
Q. What is the meaning of VPF?
The meaning of VPF is the Voluntary Provident Fund. It is often considered an extension of EPF or Employee Provident Fund. Unlike EPF, VPF contributions are voluntary, meaning any employee with an EPF account can invest additional amounts in their VPF account. The interest rate of VPF is the same as EPF.
Q. Who can open a VPF account?
Any salaried professional in the organised sector can open a VPF account. However, VPF accounts can only be opened by professionals with EPF accounts. Investors can contribute up to 100% of their monthly income (salary+DA) in their VPF account.
Q. What will happen to my VPF account if I switch jobs?
The Employees’ Provident Fund Organisation (EPFO) allows transferring of VPF accounts. So, you can shift your VPF account from one employer to another if you change jobs.
Q. Can I get a loan from a VPF account?
Yes. You can avail of a loan from your VPF account. However, the entire amount will be taxable if you withdraw money five (5) years from the account opening date.
Q. Which documents should I submit to open a VPF account?
To open a VPF account, an employee must submit the company’s Registration Certificate from the Ministry of Finance. It is worth noting that only companies registered with and approved by the Ministry of Finance can open VPF accounts. Besides the Registration Certificate, the employee must also submit Form 24 and Form 49, an employer-provided company profile, and an employer-provided business registration certificate.