Voluntary Provident Fund (VPF)

The Voluntary Provident Fund (VPF) is a valuable extension of the Employees’ Provident Fund (EPF) that allows employees to contribute more than the mandatory 12% of their basic salary and dearness allowance. Employees can choose to contribute up to 100% of their salary to the VPF, enhancing their retirement savings with the benefit of earning the same high interest rate as EPF, which is set annually by the government. Contributions to VPF are eligible for tax deductions under Section 80C of the Income Tax Act up to ₹1.5 lakh per annum, and the interest earned is tax-free if the contributions are held for at least five years.

Withdrawals from VPF follow EPF rules, making them tax-free after five continuous years of service, though premature withdrawals may incur taxes. VPF is a secure, government-backed investment offering assured returns generally higher than those from other fixed-income instruments like fixed deposits. By leveraging VPF, employees can significantly boost their long-term financial security and retirement corpus, ensuring a comfortable post-retirement life. Understanding the benefits, contribution limits, and tax implications of VPF can help employees make informed decisions to maximize their retirement savings.

Interest rate of a VPF

The rate of interest is set by the Indian Government and is revised on a yearly basis. The rate of interest for FY 2023-2024 is 8.25% p.a. which was the rate of interest previously. Investments towards a VPF account is viable because of its high rate of interest and tax benefits. Given below is the comparison of the PPF and VPF interest rates:

Financial Year	PPF rate of interest p.a.(%)	VPF rate of interest p.a.(%)
2023-2024	7.10	8.25
2021-2022	7.10	8.10
2019-2020	7.10	8.5
2018-2019	7.6 to 8	8.65
2017-2018	7.6 to 8	8.55
2016-2017	8 to 8.1	8.8
2015-2016	8.7	8.8
2014-2015	8.7	8.75
2013-2014	8.7	8.75

Key Features of Voluntary Provident Fund (VPF)

Voluntary Contributions:

Employees can contribute any amount beyond the mandatory 12% of their basic salary and dearness allowance, up to 100% of their salary and allowances.

Interest Rate:

VPF earns the same interest rate as the Employees’ Provident Fund (EPF), which is set annually by the government and typically offers higher returns compared to other fixed-income instruments.

Tax Benefits:

Contributions up to ₹1.5 lakh per annum qualify for a tax deduction under Section 80C of the Income Tax Act.
The interest earned is tax-free if contributions are held for a minimum of five years.

Withdrawal Rules:

Withdrawal rules for VPF are the same as those for EPF.
Withdrawals are tax-free after five continuous years of service, though premature withdrawals may incur taxes.

Safety and Returns:

VPF is a secure investment backed by the government, providing guaranteed returns usually higher than fixed deposits.

Long-term Investment:

VPF is intended to enhance retirement savings, significantly increasing the retirement corpus over time.

Ease of Management:

Contributions are managed through the same EPF account, allowing employees to start, stop, or modify contributions as needed.

Understanding these features helps employees leverage VPF to boost their retirement savings and achieve greater financial security.

Benefits of Voluntary Provident Fund (VPF)

Enhanced Savings: Contribute up to 100% of salary, boosting retirement savings.

Higher Interest Rates: Earn high interest rates, often better than fixed deposits.

Tax Benefits: Deductions up to ₹1.5 lakh under Section 80C, with tax-free interest after five years.

Tax-Free Withdrawals: Withdrawals are tax-free after five years of service.

Ease of Management: Managed through the EPF account, with flexible contribution adjustments.

Compounded Growth: Annual compounding accelerates growth, enhancing retirement savings.

Safety and Loans: Government-backed with secure returns and the option to borrow against the balance.

Financial Discipline and Flexibility: Promotes regular saving with no upper limit on contributions, balancing structure and flexibility.

Calculation of Voluntary Provident Fund (VPF)

To calculate your VPF contributions and the accumulated amount, follow these steps:

Determine Monthly Contribution:

Choose the percentage of your basic salary and dearness allowance (DA) to contribute, up to 100%.

Example: If your basic salary is ₹50,000 and DA is ₹10,000, contributing 20% results in: Monthly Contribution=20%×(Basic Salary+DA)=0.20×(₹50,000 ₹10,000)=₹12,000Monthly Contribution=20%×(Basic Salary+DA)=0.20×(₹50,000+₹10,000)=₹12,000

Calculate Annual Contribution:

Multiply the monthly contribution by 12: ${Annual Contribution} = ₹12,000×12 = ₹1,44,000$

Interest Calculation:

With an assumed interest rate of 8.15% per annum, compounded annually: $Rate100=₹1,44,000×8.15100=₹11,736\text{Interest for Year 1} = \text{Annual Contribution} \times \frac{\text{Interest Rate}}{100} = ₹1,44,000 \times \frac{8.15}{100} = ₹11,736$

Accumulated Amount Calculation:

At the end of the first year, the accumulated amount will be the sum of the contributions and the interest earned:

Total Amount at End of Year 1=Annual Contribution+Interest for Year 1=₹1,44,000+₹11,736=₹1,55,736Total Amount at End of Year 1=Annual Contribution+Interest for Year 1=₹1,44,000+₹11,736=₹1,55,736

For subsequent years, the interest calculation will be on the total accumulated amount from the previous year plus the contributions made during the current year.

Yearly Compounding:

Let’s calculate the accumulated amount for the second year.

Interest for Year 2=(Total Amount at End of Year 1+Annual Contribution)×Interest Rate100=(₹1,55,736+₹1,44,000)×8.15100=₹2,99,736×8.15100=₹24,426.47Interest for Year 2=(Total Amount at End of Year 1+Annual Contribution)×100Interest Rate=(₹1,55,736+₹1,44,000)×1008.15=₹2,99,736×1008.15=₹24,426.47

Total Amount at End of Year 2=₹2,99,736+₹24,426.47=₹3,24,162.47Total Amount at End of Year 2=₹2,99,736+₹24,426.47=₹3,24,162.47

Repeat for Subsequent Years:

Continue the process annually, with interest compounded on the accumulated amount plus new contributions.

Example Summary:

Contributing ₹12,000 per month at an 8.15% interest rate results in:

End of Year 1: ₹1,55,736

End of Year 2: ₹3,24,162.47

Factors Affecting VPF Calculation:

Contribution Amount: Higher contributions increase savings.

Interest Rate: Government-determined and can vary annually.

Compounding Frequency: Annual compounding enhances growth.

Duration: Longer periods lead to more significant

Example of Tax Calculation for Voluntary Provident Fund (VPF)

Contributions

Monthly Contribution: ₹10,000
Annual Contribution: ₹10,000 * 12 = ₹1,20,000
Tax Deduction: ₹1,20,000 under Section 80C (subject to the overall limit of ₹1.5 lakh)

Interest Earned

Interest Rate: 8.15%
Interest for First Year:

$Interest=₹1,20,000×0.0815=₹9,780\text{Interest} = ₹1,20,000 \times 0.0815 = ₹9,780$

The interest will be compounded annually and will be tax-free if the VPF is held for more than five years.

Tax Scenario for Withdrawals After 5 Years

Employee Contribution: Tax-free
Interest Earned: Tax-free
Employer Contribution: Not applicable for VPF as contributions are from the employee.

Tax Scenario for Premature Withdrawals (Before 5 Years)

Employee Contribution: Not taxed.

Interest and Reversed 80C Benefit:

Interest Earned: Added to taxable income.

Reversed 80C Deduction: The total amount claimed as a deduction under Section 80C will be added back to income and taxed according to the applicable slab.

Summary

Contributions: Deductible under Section 80C up to ₹1.5 lakh.
Interest:
1. Tax-free if held for more than five years.
2. Taxed as per the slab rate if withdrawn before five years.
Withdrawals:
1. Tax-free after five years.
2. Taxable if withdrawn before five years, including the reversal of Section 80C benefits.

Important Notes

Record Keeping: Maintain records of your contributions and interest earned for accurate tax calculations.
Strategic Planning: Plan your withdrawals strategically to minimize tax liabilities and maximize tax benefits.

Understanding these tax implications helps in making informed decisions regarding VPF contributions and optimizing tax savings.

Documents Required for Voluntary Provident Fund (VPF)

When opting for VPF, employees typically need to provide the following documents to their employer’s HR or finance department:

EPF Account Number: Required as VPF contributions are made into the same account.
Authorization Form: A VPF registration form provided by the employer, indicating consent to deduct VPF from the salary.
Identity Proof: Valid government-issued ID (e.g., Aadhaar Card, PAN Card, Passport, Voter ID, Driving License).
Address Proof: Document verifying residential address (e.g., Aadhaar Card, utility bills, rental agreement, Passport).
Salary Slips: Recent salary slips or a salary certificate to confirm basic salary and DA.
Photographs: Passport-sized photos (may be required for records).
Bank Account Details: Bank account number and IFSC code for verification.
Nomination Form: Form 2 (revised) for nominating a beneficiary for the EPF and VPF contributions.
Declaration Form: Any specific declaration required by the employer stating the decision to contribute to VPF.

Procedure

Contact HR/Finance Department: Express interest in contributing to VPF and request necessary forms.

Complete the Authorization Form: Fill in details, including the contribution percentage or amount.

Attach Required Documents: Attach copies of identity proof, address proof, and salary slips.

Submit the Documents: Submit the completed form and documents to HR or finance.

Confirmation and Processing: Employer verifies and processes the request, starting salary deductions for VPF.

Record Keeping: Keep copies of all submitted forms and documents for your records.

Notes

Employer Policies: Documentation requirements may vary based on the employer’s policies.
Timely Submission: Ensure documents are submitted within the specified timeline to avoid delays.

By providing the necessary documents and following the employer’s process, employees can effectively initiate and manage their VPF contributions.

Rules and regulations of a VPF

100% Contribution

Employees can contribute up to 100% of basic salary and DA.

Optional

Contribution to VPF is not mandatory.

Interest Rate

Set by the Indian Government annually

Full Withdrawal

Allowed at resignation or retirement.

Transferable

VPF balance can be transferred to a new employer.

Nominee Benefit

Accumulated amount goes to the nominee upon the account holder's death.

Eligibility

Only EPF account holders in EPFO-registered companies.

5-Year Lock-In

Contributions must continue for at least 5 years.

The Voluntary Provident Fund (VPF) is a secure, high-interest option for boosting retirement savings. It allows contributions above the mandatory Employees’ Provident Fund (EPF) limit, offering flexibility and control in retirement planning. With tax benefits under Section 80C and compounded, tax-free returns after five years, VPF is ideal for risk-averse investors. As a government-backed scheme, it ensures long-term financial stability and peace of mind, making it a smart choice for a comfortable retirement. Enrollment is easy through existing EPF accounts, making VPF a valuable tool for strategic saving.

Voluntary Provident Fund (VPF)