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.
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That’s an excellent article advising the pros and cons of VPF. This is such a wonderful instrument often obscured/underrated in the financial world especially because for advisors there is no commissions, no targets and no incentives
Would like to know if the contribution in VPF be deducted as pre-tax income?. Is it again subjected to the 80c limit?
You can claim deduction u/s 80C subject to max limit of 1.5L.
Thanks Nitin for your response. So VPF contribution might not make much sense in terms of tax benefits if one has already crossed the 1.5L u/s 80C limit?.
It is EEE only but makes sense if 1.5L limit u/s 80C is not exhausted.
Thanks for clarifying. I had got in to the impression that irrespective of the 80C limit the PF/VPF contribution would be exempted as a pre-tax income – which wasn’t reflecting in my form 15 and now rightly so.
to save additional 50,000 you should invest into NPS. This gives you additional 50,000 over 1.5L under 80C. The money which you are planning to invest in VPF can be diverted to NPS.
Withdrawal from NPS on maturity is exempted upto 40% of total corpus. Balance 60% is taxable therefore i will not prefer NPS.
Thanks sir, your guides helped me to invest in vpf and now my EPF contribution is 96% from my basic salary. Total amount goes towards EPF is 6400 per month.
Sir,
Can i pay more tham min amount directly for voluntarily pf through netbanking using uan no.
Regards
Srinivasan.k
It is not feasible. It should be deducted by your employer.
Sir although i have understood that after the end of the financial year the excluded employee having salary more than the statutory requirement as per employee provident fund scheme i.e 15000 can vary his contribution, however it is as per which section or rule of the law can he reduce his contribution to the statutory requirement of 12 % of Rs. 15000.If he has been so far paying 12 % of his salary i.e Rs,20,000.does he have to fill some form
The PF contribution cannot be below statutory requirement.
Sir My Salary is 25000 Per Month. How much I can contribute in VFP. thanks.
It depends on your investments u/s 80C for tax benefit and basic salary.
Excellent article… VPF is a hidden gem that not many salaried folks are aware of. Technically, if you fall in the highest tax bracket, you can double your returns by putting money in VPF vis-a-vis SB account interest —> 8%+ return for VPF compared to 4% (after paying 33% of 6% SB interest)
Hi Nitin, With the fall of interest rate of most small savings schemes does the interest rate of VPF has also been reduced? I heard PPF will give 8.1 for the next quarter. How much VPF will give in this time window? Many thanks.
VPF interest rate is linked to EPF interest rate. For FY 2016 it is 8.8%. VPF has no correlation with small savings scheme interest rate.
Thanks Nitin for the details.
Hi Nitin,
My EPF account is more than 5 yrs, however, I have only started making voluntary contributions in the past 1 year. In case of withdrawal, will the amount I have contributed as part of VPF be taxable ?
Also additionally as per recent changes, my understanding is that entire proportion of employee contribution (including VPF amount) can be withdrawn whereas employer’s contribution only after attaining retirement age. Is there an upper limit for withdrawal of own contribution?
Your understanding is correct. There is NO upper limit for withdrawal of own contribution.
My EPF account is more than 10 years. I am nearing retirement and want to start VPF. Will I be able to withdraw before 5 years without tax on interest income of VPF amount.
If not can I withdraw my EPF amount only and keep the VPF amount for five years
It depends on prevailing Govt policy at that time.
What does the current policy say about the tax
You can only withdraw your own contribution including VPF along with interest earned on the same. It will be tax free.
i changed my organisation two times i withdrew ist organization EPF but my pension fund is left in the same unit but i transferred the EPF from 2nd organiztion ,so how can i track the transfer amount into pension fund
You have to transfer pension fund from 1st organization to current organization. You will get an annual statement issued by EPFO. You can see the transfer status in EPFO statement. This statement is issued in the month of June/July and your employer will share with you.
Hello, would we have to wait for 5 years from the date of contribution for VPF to be tax free. For example, would I have to wait for 5 years for the contribution made in the 5th year of my tenure for it to be tax free
Please check point no 2 in my post.
Hi Nitin ,
Thanks for the article. It was very informative.
Based on the recent PFRDA gazette notifcation on withdrawal norms , i have the below questions. Please advise.
1.Any limit on VPF contributions ?
2.I am planning to take a break from my job for higher education in 2019. Can i withdraw the employee contribution + interest earned on employee contribution + VPF contribution + interest earned on VPF contribution without tax ?
Please advise
Thanks
Govt has rolled back all the new norms on PF withdrawal. Therefore, in case of 2 months break, you can withdraw your PF.
I am not clear about Pension Contribution in EPF.
After retirement, monthly pension will come for me? Or Pension will added to Lumpsum amount ?
And also government doesn’t give interest for pension contribution ?
Can you explain in details about Pension contribution with some examples ?
I will share a separate post on this topic.
I inadvertently failed to remew the VPP with my Company in April 2016.I am told that I can now only commence next year.
I need to therefore save tax-what can I do ?
Please check point no 4 in my post.
Hi Nitin. Your article is very informative. During a financial year how many times can an employee increase his VPF contribution? are there any rules which state that VPF can only be increased once in a year . My question is specific to increasing and not reducing . Is It at the discretion of the organization .
Please check point no 4 in my post. Normally organization policy states that you cannot increase/decrease/stop contribution to VPF during FY.
Dear Sir,
I would like to have a clarification for the below query:
Example: My total yearly income is 7.00 lakhs (salary 6.25 and 0.75 is income from saving account/FDs)
I have invested Rs 6000 per month in ELSS and i pay a yearly premium of 30000 to LIC. Thus amounting to 1.02 lakh yearly for claiming tax benifits under 80C.
Now as per my salary statement, i see a deduction of Rs 4050 per month towards NPS. When i see my CRA NPS account statement, it shows Rs 4027 (almost equal amount) contributed by the employer. Additionally I am voluntarily contributing Rs 3500 per month to my NPS through net banking. While filing my tax returns i was not clear on some points as under:
1. Whether my contribution of Rs 4050 per month (i.e Rs 48600) can be claimed under 80CCD(1) ? so that it reaches to exemption slab of 1.50 Lakh(1.02+0.48)
2. There is column 80CCD(2)- Employer’s contribution to NPS account, what should i put there? Rs 4027×12=48324 or shall i leave it blank.
3 Then there is sec 80CCD(1B)-Additional contribution to NPS. Shall i put my voluntary contributions (3500×12=42000) in this column so i can avail more exemption under this section.
4 Lastly, there is section 80TTA(1)-Interest Income from Savings account. As i mentioned that income from saving and FD is 0.75 lakh (0.68 from FD Maturity and 0.7 from normal saving account interest). Can i put 0.7 (Rs 7000) in this column to avail more exemption under this section.
Thanks and Regards
Rouf
Dear Sir,
I would like to have a clarification for the below query:
Example: My total yearly income is 7.00 lakhs (salary 6.25 and 0.75 is income from saving account/FDs)
I have invested Rs 6000 per month in ELSS and i pay a yearly premium of 30000 to LIC. Thus amounting to 1.02 lakh yearly for claiming tax benifits under 80C.
Now as per my salary statement, i see a deduction of Rs 4050 per month towards NPS. When i see my CRA NPS account statement, it shows Rs 4027 (almost equal amount) contributed by the employer. Additionally I am voluntarily contributing Rs 3500 per month to my NPS through net banking. While filing my tax returns i was not clear on some points as under:
1. Whether my contribution of Rs 4050 per month (i.e Rs 48600) can be claimed under 80CCD(1) ? so that it reaches to exemption slab of 1.50 Lakh(1.02+0.48)
2. There is column 80CCD(2)- Employer’s contribution to NPS account, what should i put there? Rs 4027×12=48324 or shall i leave it blank.
3. Then there is sec 80CCD(1B)-Additional contribution to NPS. Shall i put my voluntary contributions (3500×12=42000) in this column so i can avail more exemption under this section.
4. Lastly, there is section 80TTA(1)-Interest Income from Savings account. As i mentioned that income from saving and FD is 0.75 lakh (0.68 from FD Maturity and 0.7 from normal saving account interest). Can i put 0.7 (Rs 7000) in this column to avail more exemption under this section.
Thanks and Regards
Rouf
You have not mentioned whether you are private sector or Govt sector employee. Secondly, NPS is statutory contribution or voluntary contribution though it seems that contribution is statutory.
I am a Central Govt employee appointed recently (under NPS Scheme)
You can claim tax deduction only on your contribution.
Dear Sir,
What if I contribute in VPF for 2 years and withdraw the amount after 5 years?
Will I get interest on the amount accumulated by the end of second year for years (3, 4, 5 year) I was not contributing in VPF account.
You will get interest.
Hi Nitin
Are we saying that for VPF, contributions can be made only from the remaining income after paying income tax as per slab and VPF contributions cannot be deducted from taxable income if i want to say contribute 25K a months towards VPF.. For eg if my annual gross income is 10 lacs and my net income after tax is say 8 lacs, then VPF contributions have to be made from 8 lacs only which means i have already paid tax for my vpf contributions as part of my gross income.
Pl clarify on this point.
Regards
Bala
The answer depends whether you exhausted your limit u/s 80C or not i.e. are you eligible for tax deduction on VPF contribution or not.
Hi Nitin,
Great Article!
What if I would wish to view my VPF deductions? When I see in the PF Passbook, I can see only the PF deduction related entries. Apart from my payslip (which is each month), is there anywhere I can view my entire VPF deductions altogether?
You can check VPF contribution through UAN portal.
Sir, I have been contributing to VPF from the past 2 years and I want to stop contributing to it from now onwards and I want to withdraw it after few months i.e., 4 or 6 months can I do that.
You can start or stop contribution only at the beginning of the financial year. If you withdraw before 5 years then interest will be taxable. Please check point no 2 in the post.
Hey Nitin,
I work in Private sector so, the PF account is maintained by company Trust.
If I opt for VPF, are they going to open a new account for this? will I be seeing the VPF amount along with the EPF amount in the statement or is the VPF amount kept separate?
VPF will be deposited in your existing EPF account. There is NO separate VPF account.
i want to withdraw my eps pls help
You have not mentioned the purpose or reason for withdrawal as the process is different for different scenarios.
Is one time vpf possible. I am already contributing 2000 as vpf from the start of financial year; but I need to contribute an additional 30000 lumpsum towards vpf
No. It is not possible.
Does VPF has Compound Interest or Simple Interest.Same Question for EPF as i know PPF has Compound interest i want to know if both EPF and VPF has either Compound interest or just simple interest?
Interest is compounded.
Is there any Max limit % for VPF contribution?
There is no limit but in my opinion, you should not exceed the contribution beyond 1.5 Lac u/s 80C.
Thanks Nitin. When i inquired with my company (Employer) Finance department, they said that the company has an exempted trust which will not allow any of our employees to contribute more than 12% VPF. Is there a case like this?
It is correct.
Hello Nitin,Thank you for the great article.Very useful.I have one question please,it would be great if you can answer it.
I have EPF account for last 12 years.But my organization just started with VPF possibility from this financial year.I am thinking of contributing 75% of my monthly basic towards VPF contribution every month.Lets say I leave the job after 3 years from now and do not join any other organization,which means I will withdraw my amount.Now,my question is,can I withdraw my entire amount of PF(EPF+VPF) without any taxation?or is it necessary to have VPF atleast for 5 years even if my EPF account exists for last 12 years?
I answered this query in point no 2 in my post. If you withdraw the money within 5 years of contribution then you have to pay tax on interest earned from your Voluntary Provident Fund contribution.
In the above scenario, for 3 years, i get benefits of vpf in 80c deductions. if i withdraw the money after 3 years, i will have to pay taxes on the interest.. great.. Now my question is, if instead of 3 years, lets say i contribute for just 1 year. When i withdraw the VPF, i will have to pay tax on interest, my question is since i got the benefit of 80c deductions for the VPF i contributed, do i have any other tax liabilities or i will get away with the benefits of the deduction?
Your query is not clear to me but the lock-in period is 5 years.
Haaai sir your arrival is very useful
I have doubt I was working in company 3years 4th year I withdraw the pf amount. Now I am a self employ I have one small shop doing business I want to save some amount like pf amount. Is it possible can save my same UAN some amount
Or I want open new VPF account
You cannot invest in EPF or VPF as you are not employed. You may open PPF account with SBI. It is similar to EPF or VPF but check the lock-in period and withdrawal options before investment. You can also check my post on PPF.
My total EPF contribution is already 1.5 lac per anum. Can I opt for 10000/- per month contribution to VPF. is it tax free? Kindly clarify
As you already exhausted your limit u/s 80C therefore you will not get any tax deduction on VPF contribution.