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Voluntary Provident Fund: VPF offers high returns, often exceeding those of fixed deposits or regular savings accounts.
VPF interest rates are aligned with EPF rates, which the government updates annually. (Representative image)
Saving for retirement is one of the smartest financial moves you can make while earning a regular income. Investing in avenues that offer good returns can significantly enhance your retirement corpus. Among the various options available, catering to different risk profiles, the Provident Fund (PF) stands out for its safety and sovereign guarantee. This article takes you to understand the Voluntary Provident Fund.
In India, there are different types of provident funds based on employment categories:
General Provident Fund (GPF):
The General Provident Fund is a savings and retirement scheme designed specifically for government employees. It is not open to non-government employees, who cannot contribute to a GPF account.
Public Provident Fund (PPF):
Unlike the General Provident Fund, the PPF is a savings scheme available to anyone, regardless of employment type. It allows individuals to lock in their contributions for a long-term period, offering a secure option for wealth accumulation.
Also, provident funds are categorised as compulsory or optional, with the Employees’ Provident Fund (EPF) being a compulsory scheme, and the Voluntary Provident Fund (VPF) serving as an optional extension of EPF.
EPF is a retirement and savings scheme similar to the GPF. However, unlike the GPF, the EPF is mandatory for employees working in organisations with more than 20 employees.
What is a Voluntary Provident Fund?
The Voluntary Provident Fund (VPF) allows salaried individuals to contribute more than the mandatory 12% of their basic salary and dearness allowance to their EPF account.
With VPF:
- Employees can voluntarily contribute up to 100% of their basic salary and dearness allowance.
- Contributions earn the same attractive interest rate as EPF (8.25% in FY24).
- The interest earned is tax-free, making it a lucrative, low-risk savings option.
How to Start Investing in VPF?
Check Eligibility:
Only salaried employees with an active EPF account can opt for VPF. Self-employed individuals or those in the informal sector are not eligible.
Inform Your HR/Payroll Team:
Submit a written request to your HR team specifying the amount you wish to contribute. The amount will be automatically deducted from your salary each month.
Choose Your Contribution:
Contributions can range from a small percentage to the full 100% of your basic salary. Note that contributions up to Rs 1.5 lakh annually are eligible for tax deductions under Section 80C.
Monitor Interest Rates:
VPF interest rates are aligned with EPF rates, which the government updates annually. Stay informed to maximise your returns.
The Central Board of Trustees of the EPFO, in consultation with the Finance Ministry, reviews this rate annually.
Why Choose VPF?
Attractive Interest Rates:
VPF offers high returns (8.25% in FY24), often exceeding those of fixed deposits or regular savings accounts.
Tax Benefits:
-Contributions up to Rs 1.5 lakh qualify for Section 80C deductions.
-Both the interest earned and the maturity amount are tax-free, provided the investment is held until retirement.
Government-Backed Security:
Your investment is safe and unaffected by market risks, making it ideal for risk-averse individuals.
Hassle-Free Management:
Contributions are deducted automatically from your salary, ensuring a seamless and disciplined savings approach.
Flexible Withdrawals:
While VPF is retirement-focused, funds can be withdrawn during emergencies such as medical needs, children’s education, or home purchases. Note that early withdrawals (before five years of continuous service) may incur taxes.
Key Considerations
Long-Term Commitment:
VPF is designed for retirement savings. While partial withdrawals are allowed, treating it as a long-term investment yields the best results.
Tax on Excess Contributions:
If the combined contributions to EPF and VPF exceed Rs 2.5 lakh annually, the interest earned on the excess is taxable.
No Employer Contribution:
Unlike EPF, VPF contributions are solely from the employee. This may marginally affect the overall growth of your retirement corpus.
Why VPF is Worth It
For those seeking a high-interest, low-risk investment, VPF is an excellent choice. It’s perfect for individuals looking to boost their retirement savings without venturing into volatile stock markets or mutual funds.
By consistently contributing to a VPF, you ensure a secure financial future and enjoy the dual benefits of high returns and tax savings.
Disclaimer: The views and investment tips by experts in this News18.com report are their own and not those of the website or its management. Readers are advised to check with certified experts before making any investment decisions.
