Voluntary Provident Fund or VPF is most useful yet most neglected tax saving option. Financial Planners or Relationship Managers will not suggest this as there are no commissions, no targets and no incentives. This option is available only to salaried individuals who are member of EPF or Employee Provident Fund. Every month, 12% of basic salary is compulsory deduction towards contribution to EPF. Ref to EPF contribution, not many people are aware that EPF is eligible for dedcution u/s 80C and is part of overall capping of Rs 1.5 lakh u/s 80C. For example, if you are contributing Rs 50,000 every year as your / Employee Contribution towards EPF account then you should only worry about balance Rs 1 lakh to save tax u/s 80C. Interest Rate for Provident Fund account is declared every year by the Government of India and for current FY i.e. 2014-15 Interest Rate is 8.75%. The Interest Rate is market linked. It is 25 bps or 0.25% more than average 10 year G-Sec yield for the previous year.
As an employee you can contribute more than 12% of your basic salary towards EPF account. This voluntary contribution to EPF account is Voluntary Provident Fund & becomes part of EPF. Voluntary Provident Fund is treated at par with compulsory contribution of 12% Basic salary in terms of tax treatment and interest rate. In short, an employee can get earn interest rate of 8.75% on Voluntary Provident Fund and can claim tax deduction u/s 80C. Tax treatment is same as EPF i.e. EEE. Income tax exemption at all 3 stages i.e. contribution/investment, accumulation/returns and at the time of withdrawal.
Another important point i would like to highlight is that it is always advisable to keep your investments in as less no of accounts as possible. The similar investment objectives should be clubbed to reduce operational hassle of operating multiple accounts. I observed that many salaried employees open Public Provident Fund account. The investment objectives of Voluntary Provident Fund and Public Provident Fund are almost similar. Salaried employees instead of opening separate Public Provident Fund a/c can opt for Voluntary Provident Fund.
One of the common myth is that similar to EPF, employer will also contribute equal amount against VPF contribution by employee. It is not true, as the name suggests VPF is voluntary contribution. There will not be matching contribution from employer against VPF contribution by employee.
Limitations of Voluntary Provident Fund
1. Maturity: As we know that the basic objective behind Provident Fund is to build corpus for retirement therefore you can withdraw EPF only at the time of retirement. For private firm employees there is an option to withdraw at the time of leaving job if there is a gap of 2 or more than 2 months between two jobs. Personally i never suggest withdrawal from EPF account. It should be saved for retirement. One time premature withdrawal is allowed from EPF but only for marriage of a child, property purchase or medical emergency.
2. Lock in period: Though contribution to Voluntary Provident Fund is tax free at maturity but if you withdraw the money within 5 years of contribution then you have to pay tax on interest earned from your contribution to Voluntary Provident Fund. If you are planning to invest in tax saving instrument with least lock-in period then you may consider Equity Linked Saving Schemes with lock-in period of just 3 years.
3. Only salaried employees under EPF can opt for Voluntary Provident Fund: Contribution under Voluntary Provident Fund is not available for everyone. If you are self employed like me, businessmen or salaried but not covered under EPF then you cannot contribute under Voluntary Provident Fund.
4. Contribution to Voluntary Provident Fund cannot start or stop during the Financial Year: If you are planning to contribute to Voluntary Provident Fund then you need to inform your organization at the beginning of financial year. You cannot start contributing in between the FY. Secondly, once you opted then you cannot back out or stop your contribution during Financial Year. You have to compulsorily complete cycle of financial year. I would like to add that technically it is feasible for organizations to start and stop VPF contribution during financial year but its an operational nightmare for them. Under special circumstances they may accept your request to start or stop contribution to Voluntary Provident Fund during FY.
5. Market Linked Interest Rate of PF: As i mentioned that interest rate of Provident Fund is linked to average 10 year G-Sec yield for the previous year. During lower interest regime, the return from Voluntary Provident Fund may decline and during increasing interest rate scenario you may get higher interest rate. Be mentally prepared for fluctuating interest rates.
Conclusion: Like every investment plan, Voluntary Provident Fund has its own set of advantages and disadvantages. It is one of the most tax efficient way of saving tax for risk averse investors because of EEE exemption. Secondly, these days in order to make salary structure more tax efficient most of organizations keep basic salary low and include more flexi components in CTC. As a result, the contribution to EPF is not in accordance to salary level. As a result employee end up saving very little for retirement corpus. As a thumb rule, 10% of salary should be saved for retirement and if you feel your contribution towards retirement corpus is less then you may opt for Voluntary Provident Fund. It is not necessary that you have to contribute towards VPF only to save tax. It can be great tool to build retirement corpus.
Employees who are in low income tax bracket can save tax u/s 80C by contributing balance amount i.e. difference between max limit of Rs 1.5 lakh u/s 80C and Investment u/s 80C including 12% contribution to EPF in Voluntary Provident Fund.
I hope that with the introduction of UAN (Universal Account No) which is being now being allotted to all the members of EPFO. It is now very easy and convenient to operate your EPF account. Even EPFO send SMS whenever PF contribution is credited to your EPF account (If your mobile no is registered). Your EPF account is as good as savings account and similar to net banking you can check the status of account and balance in your EPF account. This ease and convenience will inspire more & more people to contribute to Voluntary Provident Fund not only for tax saving but to build retirement corpus.
I hope you liked the post. Do share your comments, feedback and queries through following comments section.
Copyright © Nitin Bhatia. All Rights Reserved.