What is Voluntary Provident Fund?
Voluntary Provident Fund (VPF) aka Voluntary Retirement Fund is the voluntary fund contribution from the employee towards his provident fund account. This contribution is beyond the 12% of contribution by an employee towards his EPF. The maximum contribution is up to 100% of his Basic Salary and Dearness Allowance. Interest is earned at the same rate as the EPF. Employers are under no obligation to contribute to their employees’ VPF portfolio. Likewise, an employee is also under no obligation to contribute to the Plan. Once the contribution is chosen in VPF, the same cannot be terminated or discontinued before the base tenure of 5 years is completed. The interest rate of the Voluntary Retirement Plan is decided by the Government of India at the start of each financial year.
Who can Invest in a Voluntary Provident Fund?
A VPF is an extension of the EPF. The VPF option is available only to salaried individuals who receive their monthly payments through a specific salary account.
Documents Required to Open a VPF Account
The below-mentioned documents must be submitted in order for employees to open a VPF account:
- The company registration certificate with the Ministry of Finance (MoF) must be submitted.
- Form 24 and Form 49 must be submitted.
- In case the organisation is an ‘Sdn Bhd’, the memorandum and articles of association must be submitted.
- The company profile in details must be given.
- The business registration certificate must be submitted.
Employees can check with their employer if any further documents need to be submitted to open a VPF account.
Interest Rate of a VPF
The rate of interest is set by the Indian Government and is revised on a yearly basis. The rate of interest for FY 2018-2019 is 8.65% p.a. The interest has been increased from 8.55%, which was the rate of interest for FY 2017-2018. Investments towards a VPF account is viable because of its high rate of interest and tax benefits.
Process to Withdraw Money from a VPF Account
In case of financial requirements due to medical emergencies, withdrawing money from a VPF account could come in handy. Employees must fill up Form-31 and give a request letter in writing for VPF withdrawal. Employees will be able to get the Form-31 from their employer’s Human Resource (HR) team or on the government’s portal. All required documents, including the details of the employee such as PF number, postal address, and bank details must be submitted. A cancelled cheque must also be submitted. All documents that are submitted must be self-attested.
In case of any unforeseen financial emergencies, employees are allowed to withdraw from the VPF account. Some of the reasons where the VPF can be broken are mentioned below:
- In case medical bills of the account holder or his/her children need to be paid.
- For the marriage or higher-education of the account holder.
- To buy new land or a house or for the construction of the house.
Tax Benefits Available Under a VPF
When it comes to various investment options in India, the VPF account is considered among the best. Under Section 80C of the Income Tax Act, 1961, employees are eligible for tax benefits of up to Rs.1.5 lakh. The interest that is generated from these contributions is also exempt from tax. However, in case the rate of interest is more than 9.50% p.a., the amount will be taxable.
Benefits of Voluntary Provident Fund
The VPF falls under the EEE category ( EEE – exempt on contribution; exempt from the principal; exempt on interest) making it an excellent tax saving option. It also helps the employee amass a sizable savings portfolio and help him during big life milestones.
Other Benefits are:
a. Safe Investment Option
The scheme is managed by the Govt of India with fixed interest accrual. Hence, it is considered as a risk-free investment compared to the long-term investment ones offered by other private players.
b. Easy to Apply
To open a VPF account, an employee has to approach his HR/Finance team and advise them to raise a request for an additional contribution in the VPF through a registration form. The existing EPF account will serve as the additional VPF account.
c. High Returns
Currently, the interest is accrued at 8.65% per annum under this scheme. Contributions up to 1.5 lakhs PA and interest accrued is exempt from tax under Section 80C, resulting in higher returns in a long-term perspective.
d. Easy Transfer
The account can be transferred from one employer to another upon changing jobs.
Rules and Regulations of a VPF
The rules and regulations of VPF account are mentioned below:
- When compared to an EPF account, employees are allowed to contribute 100% of their basic salary and dearness allowance towards a VPF account.
- It is not compulsory for employees to contribute to a VPF account.
- The Indian Government decides the rate of interest of a VPF account at the start of the financial year. The rate would increase or decrease when compared to previous years.
- The full amount that is available at maturity can be withdrawn at the time of resignation or retirement. Individuals can also transfer their VPF amount from the previous employer to the current one. In case the account holder passes away, the legal heir or the nominee will receive the total amount that has been accumulated.
- Only individuals who work for companies that come under the Employees’ Provident Fund Organisation (EPFO) and have an EPF account are eligible to open a VPF account. Individuals who work for unorganised sectors are not allowed to open a VPF account.
- Individuals can open a VPF account at any given time during the financial year. Investments made towards the account cannot be stopped for a period of 5 years.
- Partial withdrawals in the form of loans can be made against the VPF account. In case the amount is withdrawn before the maturity period, the withdrawn sum is taxable.
Frequently Asked Questions (FAQs)
Q.Who are ideal candidates for a VPF account?
A.Anyone who is looking to invest in a long term financial instrument is an ideal candidate. VPF accounts are best suited for people who are nearing retirement and/or are looking out for a robust, safe and scalable pension fund option.
Q.What is the maximum and minimum amount that can be invested in VPF?
A.When it comes to investment, there isn’t any maximum or minimum VPF Limit. The same is decided by your individual monthly contributions. You can earmark as much as 100% of your monthly income (salary + dearness allowance) as VPF contribution. Note that your employer isn’t obligated to contribute to your VPF account. Hence, the money accumulated in your voluntary PF account is directly dependent on your monthly contributions and the interest accumulated by the same over the tenure of the investment.
Q.How much amount can I withdraw as loan against my VPF account?
A.Partial withdrawals are possible as also the complete withdrawal of the monies accumulated in the VPF account. Usually, people who are changing jobs are prone to breaking their voluntary pf accounts and accessing the funds. However, note that if such an action is completed before said account has completed 5 years of existence, the accumulated funds are subject to taxation.
Q. Will my VPF account get affected if I change jobs?
A:The VPF account is linked to your Aadhar Card. So, it is very easy to transfer your account from one employer to another.