What is VPF?
Voluntary Provident Fund(VPF) is one of the most useful tax-saving options and yet it is neglected. It is neglected because it doesn’t have incentives, commissions and targets attached to it and only available to employed individuals, members of Employed Provident Fund (EPF). There is a compulsory 12% deduction in salary for the EPF account, while this account is eligible for deduction under 80C upon an investment of about 1.5 lakhs. The interest rate for the provident fund changes every year, currently, it is about 8.8%.
It is purely a matter of choice to contribute 12% or more of your salary to Voluntary Provident Fund as a part of EPF. In terms of tax and interest rate the VPF is treated as EPF, i.e. an 8.8% interest on the VPF and a tax deduction under section 80C. Similar investment can be clubbed together. A Public Provident Fund, PPF, and VPF are similar, so instead of opening a PPF, employees can opt to open a VPF. Another advantage of VPF is that as the name suggests it is voluntary so there won’t be a matching contribution from an employee and employer.
Should you invest in VPF?
- VPF is an employee’s contribution towards retirement amount. The amount is directly deducted from the salary making it a regular investment with a fixed rate of return. The con is the fixed return on the investment doesn’t give a lump sum amount at the time of retirement. So it will be better to choose other financial instruments that would give better returns.
- Having a Systematic Investment Plan to diversify in the equity mutual fund would give an increment in the retirement amount. A certain amount gets deducted monthly from the salary thereby helping to save and a chance for the money to grow. Getting this along with the PF, will result in a long-term growth product. Taxation for VPF is similar to PF, so diversifying the investments would be beneficial.
Limitations of VPF
- Maturity: An EPF is meant to provide a huge retirement amount only at the time of retirement. For someone in the private sector can withdraw their EPF if there is a gap of 2 or more than 2 months between two jobs. But still it is advised to keep the EPF and be saved till retirement.
- Lock in period: There is a lock-in period of 5 years before which if the money is withdrawn from the VPF the tax savings on the contribution earned from it, needs to be paid. While Equity linked saving schemes has a lock-in period of 3 years.
- A salaried person under EPF can afford VPF: The self-employed person or business person is not eligible to contribute.
- Contribution to the VPF at the beginning of the financial year: If planning to contribute, the organisation needs to be informed at the beginning of the financial year and can’t start contributing in between the FY. Once started, it cannot be stopped during the FY. Actually, it is feasible to start and stop in between an FY but it becomes an operational problem, so it is usually avoided.
- Market linked to interest rate: The interest rate fluctuates within the market. There will times when the interest rate will be high and at times it will be low, thus affecting the returns.