What Is Voluntary Provident Fund?

5paisa Research Team Date: 19 Apr, 2023 05:53 PM IST

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Introduction

There are various investment avenues available to individuals. Investors are spoilt for choice. However, some investment alternatives are favourable for some individuals. A voluntary Provident Fund is one such investment option for salaried employees. 

Voluntary Provident Fund is investors who seek high returns and tax benefits with a low-risk appetite.
 

What is VPF (Voluntary Provident Fund)?

A Voluntary Provident Fund is a government-backed extension of the Employee Provident Fund (EPF). However, contributions to VPF are not mandatory and are in addition to EPF contributions. The VPF contribution is in addition to the mandatory twelve per cent employee contribution towards EPF. The employer is not obligated to contribute to the employee's VPF account. 

The Government of India determines the interest rate for Voluntary Provident Fund at the beginning of each financial year. The Voluntary Provident Fund has a minimum tenure of five years. Typically, the interest rate is similar to EPF. The maximum VPF contribution is a hundred per cent of an individual's basic salary and dearness allowance. An individual cannot terminate or discontinue the contribution before completing five years. 
 

Who can invest in Voluntary Provident Fund?

The Voluntary Provident Fund is a subset of the EPF. Therefore, only salaried individuals can invest in VPF. The salaried employee must receive timely payments in a specific salary account to be eligible for investment. 

How to Open a VPF Account

An employee must follow the below steps to open a Voluntary Provident Fund account.
 
1.    An employee must begin with a written request to the employer for an additional deduction from the salary. 

2.    The employee must provide the employer with personal details and the monthly investment amount.

3.    The employee can open a VPF account anytime during the current financial year. However, employers advise employees to start investing at the beginning of a financial year. 

VPF Eligibility

Voluntary Provident Fund contributions are exclusively for salaried employees who receive a monthly income. The employee may be in the private or the public sector. 

Documents required to open a VPF account.

An employee will require the following documents to open a Voluntary Provident Fund Account.

●    A detailed company profile
●    The business registration certificate
●    Form 24 and Form 49 in the prescribed form
●    The company registration certificate with the Ministry of Finance (MoF)
●    The memorandum and articles of association if the organisation is an 'Sdn Bhd'.

The employees can verify with the employer if additional documents need submission to open a VPF account.

Benefits of Voluntary Provident Fund

The primary advantage of Voluntary Provident Fund accounts is that it falls under the Exempt-Exempt-Exempt (EEE) category, i.e., tax is exempt on investment, income and maturity. Therefore, Voluntary Provident Fund investments earn significant returns, and employees can enjoy tax benefits.  

The other benefits of the Voluntary Provident Fund are as below.

a.    Safety of Investment
Voluntary Provident Fund contribution is safe against other investment options offered by private organisations. The Government of India operate the scheme hence the default risk is negligence. It is ideal for investors with a low-risk appetite. 

b.    Return from Investment
Over the last few financial years, the interest rate under the VPF scheme has been close to eight per cent per annum. The interest rate is quite rewarding compared to other fixed-income instruments. Additionally, VPF contribution is a long-term investment, and investors benefit from the power of compounding. 

c.    Ease of Transaction 
The process to open a VPF account is straightforward and hassle-free. Employees can use the current EPF account as the VPF account as well. Employees without an EPF account can submit a registration form to the employer's finance team. 

d.    Change in Employment 
The transfer process is simple in case of a change in employment. The employee can carry forward the VPF account from the previous to the current employer. 

e.    The habit of savings 
VPF encourages savings since it requires continuous monthly investment for five years. Additionally, there are restrictions on withdrawal. Therefore, it teaches financial discipline and encourages savings among investors. 

PF Vs EPF Vs VPF

The difference between PF, EPF and VPF is as below.

Characteristics

Public Provident Fund

Employee Provident Fund

Voluntary Provident Fund

Investor Category

Any Indian can invest, but NRIs cannot.

Only Indian salaried individuals can invest.

Only Indian salaried individuals can invest.

Investment Tenure

The investment tenure is fifteen years, with an option to renew every five years.

Investment tenure is till the age of retirement or resignation, whichever is earlier.

Investment tenure is till the age of retirement or resignation, whichever is earlier.

Employee's Contribution

Not Applicable

12% of Basic Salary and Dearness Allowance.

The maximum contribution is up to 100% of the Basic Salary and Dearness Allowance.

Employer's Contribution

Not Applicable

12% of Basic Salary and Dearness Allowance.

Not Applicable

Maximum Loan Amount

50% of the investment value after six years

EPF permits partial withdrawal.

VPF permits partial withdrawal.

Type of Investment

Non-Mandatory

Mandatory

Non-Mandatory

 

 

Tax benefits available under a VPF

The income and maturity amount from the Voluntary Provident Fund is tax-exempt. Additionally, you can even claim tax exemption for investment in VPF. Employees can claim tax benefits of Rs. 1.50 Lakhs under Section 80C of the Income Tax Act, 1961. 

The interest earned on the investment is tax-exempt. Although if the interest rate is more than nine and a half per cent per annum, then the income is taxable.

The interest rate of a VPF

The Government of India determines the interest rate for VPF investment. They review the interest rate every year in line with the repo rates of the Reserve Bank of India. Typically, the interest rate for EPF and VPF is similar. The VPF interest rate for FY 2023-2024 is 8.1% per annum. Find below a summary of interest rates over the past few years.

Financial Year

PPF Interest Rate

VPF Interest Rate

2022-2023

7.10% p.a.

8.10% p.a.

2021-2022

7.10% p.a.

8.10% p.a.

2019-2020

7.10% p.a.

8.50% p.a.

2018-2019

7.60 to 8% p.a.

8.65% p.a.

2017-2018

8 to 8.10% p.a.

8.55% p.a.

Rules and regulations of a VPF

Investments in Voluntary Provident Fund are subject to certain rules and regulations. Each employee and employer must adhere to the following conditions.

a.    The maximum employee contribution to the VPF account is a hundred per cent of the basic salary and dearness allowance.

b.    The Government of India determines the interest rate on VPF contributions at the start of the financial year. The rate may vary in comparison to previous years.

c.    Only individuals employed with companies under the Employees' Provident Fund Organisation (EPFO) can open a VPF account. Individuals employed in unorganised sectors cannot open a VPF account.

d.    Individuals may open a VPF account anytime during a financial year. However, an employee cannot stop investing in VPF for five years. The investor cannot stop investment before the completion of five years. 

e.    In case of an emergency, the investor can opt for partial withdrawal. Partial withdrawal is in the form of a loan. The withdrawn sum is taxable if the amount is withdrawn before the maturity period.

f.    The option to withdraw the entire investment amount is available at maturity. Maturity is the time of retirement or resignation, whichever is earlier. 

g.    In case of a change in employment, individuals can transfer their Voluntary Provident Fund contribution from the previous employer to the current one. 

h.    If the employee or the primary account holder passes away, the legal heir or the nominee will receive the total amount accumulated.
 

The process to withdraw money from a VPF account.

Employees can withdraw funds from a Voluntary Provident Fund account in case of any emergency. The employee must follow the steps below to ensure hassle-free withdrawal – 

1.    Employees must submit a request letter and fill out Form-31 for VPF withdrawal. Form-31 is available on the government portal. Alternatively, the employer's Human Resources (HR) team can provide the same. 

2.    The employee must submit all the required documents, such as employee details, postal address, PF number, and bank details. The employee must self-attest all the documents. 

3.    Lastly, the employee must also submit a cancelled cheque.

However, withdrawal from Voluntary Provident Fund is only in case of exceptional and unforeseen circumstances. These include

1.    Payment for medical bills of the account holder or children.
2.    Marriage or higher education of the account holder.
3.    To purchase a new house or land to construct a house

Conclusion

While investments in Voluntary Provident Fund are not as popular as EPF Investments, it is an attractive instrument for salaried individuals. Additionally, the employee has the prerogative to decide the minimum investment. Therefore, it is not a burden for the employee but encourages periodic savings. 

Investors often compare the return from provident funds with equity instruments. However, provident fund investments are low-risk and tax-saving instruments. 
 

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