What Does Voluntary Provident Fund Mean and How Does it Work?

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What is Voluntary Provident Fund

Voluntary Provident Fund (VPF) is also known as the Voluntary Retirement Fund wherein the contribution is voluntarily made by the employee towards his/her provident fund. An employee can make a contribution maximum of 100% of his/her Basic Salary and Dearness Allowance. The rate of interest for this retirement planning scheme is the same as of EPF.

Basic Guidelines and Rules of VPF

  • The employers do not have any obligations to contribute to the VPF of the employee.
  • An employee is also not under any obligation to contribute to this scheme. However, if an employee has opted for VPF contribution, then he/she cannot discontinue or terminate before contributing to it for a minimum of five years.
  • The Indian Government decides the rate of interest of the Voluntary Retirement scheme at the begging of every financial year.
  • A salaried professional who is enrolled with the Employee Provident Fund (EPF) scheme is eligible to avail of the VPF scheme of retirement planning.
  • One cannot withdraw or discontinue the VPF scheme in the middle of a year.
  • If the direct tax code becomes effective, then the complete amount of maturity becomes taxable.
  • If an employee withdraws the VPF amount within 5 years, then he/she has to pay the tax on the amount that he/she has earned as interest through his/her contribution towards this retirement planning scheme, VPF.
  • One can contribute up to 100% of his/her Basic with Dearness Allowance as an investment in the VPF scheme.

Who Can Invest in VPF?

VPF is an extension of the EPF scheme and it can only be availed by salaried employees who get salary on monthly basis in their salary account.

The requirement of Documents to Open a VPF

An employee has to submit the below-mentioned documents to open a VPF account:

  • An employee should submit a Registration certificate of his/her company with the Ministry of Finance (MoF).
  • He/she has to submit Form 49 and Form 24.
  • A detailed profile of the company should be provided.
  • If the company is an 'Sdn Bhd', then the articles and memorandum of the association should be submitted.
  • The registration certificate of the business should be submitted.

Note: An employee has to check with his/her employer for the requirement of any further documents for opening a VPF account.

The process to Enroll in VPF Account

  • Only salaried employees who are enrolled in the EPF scheme are eligible to enroll in the VPF scheme.
  • If the organization is offering the option of VPF, then the employees can easily opt for the pension scheme during any time of the financial year.
  • The VPF application should be duly filled, signed, and submitted to the finance, accounts, payroll desk of the organization.
  • The employee can as well request his/her employer to increase his/her contribution to VPF by giving a request in written and asking for some additional deduction from the salary.

The process to Invest in VPF

It is simple to invest in VPF and those who are eligible to enroll in VPF account can contribute up to 100% of the Dearness Allowance and Basic Salary. The process of VPF investment needs an employee to write to his/her employer or his/her company y’s concerned HR about increasing the PF contribution amount by the desired amount. This option can be availed at any point of time in the financial year unless the employer of the employee has specified his/her requirement. For the same, an employee has to fill the VPF form, sign, and then submit it to the concerned person or accounts department of the company. In the VPF form, one has to provide only the details like the amount that one wants to contribute from his/her basic salary and dearness allowance.

Advantages of VPF Investment

The Voluntary Provident Fund account comes under the category of EEE (Exempt over the contributions that one makes – Exempt from the principal amount – Exempt on the earned interest). Therefore, all the employees can enjoy the benefits of the tax. Moreover, an employee can also earn a good amount of money in the long term by investing in this strategy. Some of the main advantages that one gets by investing in this retirement planning are:

  • High-Interest Rate: In the VPF scheme, the interest rate that one earns is 8.65% per annum. The interest that one gets from the contributions that he/she makes is as well exempted from the tax.
  • One of the Safest Options for Investment: Since VPF is one of those retirement planning plans that is operated by the Government of India, hence there is no risk involved to invest in this scheme. On the other hand, other long term investment plans that are offered by various private organizations are not as safe as VPF.
  • Process of Transfer is Very Simple: In case of change of job, VPF account transfer is very easy from an old company to a new company.
  • The process to Apply is Very Easy: The application process to open a VPF account is very easy. All an employee needs to do is to contact his/her financial desk and ask them to open a VPF account by submitting the form of registration. A current EPF account of an employee can also work as a VPF account.
  • Tax Benefits: When one talks about different investment options that are available in India, VPF is considered as one of the best. An employee can get a tax benefit of up to Rs.1.5 Lakh u/s 80C of the IT Act, 1961. The interest that one gets from the contributions that he/she has made in the VPF account is as well exempted from the tax. However, if the rate of interest is more than 9.5% per annum, then this amount will also be taxable.
  • VPF Interest Rate: The interest rate of the VPF scheme is decided by the Government of India and it is revised every year. The interest rate for the Financial Year 2018 – 19 is 8.65% per annum. This interest rate is increased from 8.55% to 8.65%. In the below table, we are providing the rate of interest of VPF and PPF schemes concerning the Financial Year:

Financial Year

VPF Interest Rate

PPF Interest Rate

2013 – 14

8.75%

8.7%

2014 – 15

8.75%

8.7%

2015 – 16

8.8%

8.7%

2016 – 17

8.8%

8 - 8.1%

2017 – 18

8.55%

7.6 - 8%

2018 – 19

8.65%

7.6 - 8%

Facility of Withdrawal

This retirement scheme allows partial withdrawal as loans and provides the facility of complete withdrawals. If the withdrawal occurs before the minimum tenure of five years, then the tax will be applicable on the maturity amount that is accumulated. Once an employee retires or resigns from his/her employment, then the final amount of maturity is paid to him/her. However, at the situation of the sudden death of the account holder, the nominee gets the possession of the VPF account's accumulated fund.

The main reason for the popularity of the VPF scheme is its accumulated amount, which can easily be withdrawn at any given time. In the situation of some unforeseen financial crisis/ emergency in the family, one can easily fall back to his/her VPF scheme. The accumulated amount in the VPF account can be broken because of many reasons:

  • For the payment of the medical bills of the VPF account holder or his/her children.
  • For the higher education and marriage of the account holder.
  • For purchasing a new house or land or for the payments of the home construction.

Final Words:

VPF is one of the best schemes that one should opt-in his/her retirement planning kitty. The high-interest rate and the freedom to select the contribution are some of the best features of this scheme. Go through the necessary details before you invest.