Voluntary Provident Fund (VPF) can be defined as a scheme that is a modernized option of the provident fund scheme. Under the VPF scheme, the contributor decides a fixed amount of contribution made by him/her every month. Here, the contributor is the employees who make contributions towards provident funds voluntarily.
There is no fixed rule of 12% that the employee makes towards Employee Provident Fund (EPF) unlike traditional schemes. Once, the contribution is done in the Voluntary Provident Fund scheme, it cannot terminate or discontinue before the maturity period which is 5 years. The government of India fixes the interest rate at the beginning of each financial year.
Features of VPF
The unique features of voluntary provident fund which make it different from the previous schemes are as:
As the VPF scheme is an extension to the EPF scheme, only salaried individuals who receive payment every month are eligible to invest in the scheme. Also, he should be an employee in an organization with more than 20 workforces which means one must work in EPF recognized organization to avail of the VPF scheme.
- Interest rate:
VPF offers a high-interest rate of 8.5% per annum which is higher in comparison to the EPF scheme. Hence, these rates may differ from year to year.
- Maturity Period:
The scheme has a lock-in period of 5 years and withdrawal will do in the form of a loan either partial or complete. Since VPF is maintaining through an EPF account, an individual can withdrawal the amount upon retirement or unemployment for more than 2 months. In case of emergency, withdrawal is possible the only difference is the applicable tax rate here.
There is no hard and fast rule for the contribution in the VPF. One can contribute as much as he/she wants.
- Tax exemption:
The employee is eligible to get tax exemption if the contribution in the account of up to 1,50,000 and interest accrued is exempt for tax under Section 80C. Additionally, if in any case, the individual withdraws the money before the lock-in period the tax is the charge on the accumulated amount. If an individual does not withdraw any money for 5 years, then the maturity amount is exempt from the wealth tax.
How to open a VPF account?
To open a VPF account, the below-mention documents are required to be submitted by the employees.
- The company registration certificate with the Ministry of Finance.
- Form 24 and Form 49.
- The company profile (in brief)
- If the organization is ‘Sdn Bhd’, the memorandum of association (MOA) and article of association (AOA).
The withdrawal from the VPF account can do in the form of a loan as a partial or complete withdrawal. If the employee resigns or retires from the employment the final maturity amount will pay to him/her. In case of the death of the account holder, their legal heir is eligible to get the lump sum from the VPF account. In case of emergency, such as health issues withdrawal can be possible before 5 years with an accumulated tax on the amount. The account can break down before the maturity period for several reasons:
- Payment of medical bills
- Cost-intensive schemes such as higher education or child marriage
- Payment in the house construction
Benefits of VPF
- Easy to apply:
It is very easy to open an account. The employee has to approach the HR/Finance team and tell his/her desire to the additional contribution to the account through the registration form. The existing EPF account will serve as the additional VPF account.
- High Returns:
One can avail of high returns through the account. As the current rate of interest is 8.5 % p.a. , which is change by the government of India at the beginning of each year, which results in a higher return for a future perspective.
- Easy transferability:
The account can be easily transferable from one company to another company, in the case of a job change.
- Tax exemption:
The employee is eligible to get tax exemption if the contribution in the account is up to 1,50,000 and interest accrued is exempt for tax under Section 80C.
- Safe option:
As the scheme will handle and manage by the government of India with a fixed rate of interest. Hence, it is considered the risk-free investment option as compared to other options of private institutions.
Rules and Regulations of a VPF
The rules and regulations for the scheme are mention below:
- Employees can contribute 100% of their basic salary and dearness allowance to the VPF account.
- Employees don’t need to contribute to the account.
- The government of India has the responsibility of fixing the rate of interest at the beginning of each financial year. There may be an increase or decrease in the interest rate as compared to the previous year.
- The individuals who are associated with the Employees Provident Fund Organization (EPFO) and have an EPF account are eligible to open a VPF account. Whereas, if individuals who are associated with the unorganized sector are not allowed to open a VPF account.
- The investment in this account is done for a minimum of 5 years.
Difference between VPF and PPF
There are some differences between VPF account and EPF account. List below are as:
- A voluntary provident fund is only meant for salaried employees while a PPF account can also open by a non-salaried person.
- There is no tax charge on the income of the PPF account. Whereas, VPF account contribution amount will qualify for tax deduction under Section 80C of the Income Tax Act 1961.
- There is a minimum of 15 years of investment required in the PPF account. On the other hand, in VPF minimum investment is deposit up to retirement or resignation.
- The 50% withdrawal can possible in a maximum of 6 years in the case of PPF, whereas, the lock-in period is 5 years in the case of VPF.
Both PPF and VPF have their positive and negative side. PPF is available for both salaried and non-salaried individuals except non-residents Indians (NRI). Also, PPF has a maximum of 1.5 lakh investment limit, whereas, there is no such limit in VPF. In terms of return, PPF offers 7.10% per annum, while VPF offers 8.5 % per annum (however these rates changes every year).
In VPF you don’t need to deposit the money from your saving account. However, in PPF you can contribute whenever you can. At last among both the investment option, VPF looks better because it offers a high rate of interest and tax exemption benefit.
Frequently Asked Questions
VPF is the extension of EPF. In the case of an EPF account, a person has to mandatory give 12% of the basic salary and dearness allowances. Whereas, in VPF there is a voluntary contribution with a maximum limit of 100%.
All salaried employee work in the organized sector is eligible to open a account.
No, there is no effect in the VPF account if you change the job. Because your account is linked to your aadhar number. So, it is very easy to transfer the account from one employer to another employer.
There is no maximum or minimum limit in the account. One can also contribute 100% of the monthly salary.
The person who is looking for a long-term financial instrument is the ideal candidate for the account. It is suitable for the person who is near to their retirement period and looking for a safe investment option.
Withdrawal before the lock-in period is only taxable.
Yes, you can invest in both EPF and VPF. If you fall in the high-income tax brackets and looking for a good investment option for a longer period.