The Covid-19 pandemic has dealt a huge blow to the economy with businesses announcing pay cuts and lay-offs. The slowdown in the economy has also impacted the salaried individual’s income and investments.
The unprecedented and uncertain situation that we are in today calls for steps that assure liquidity in times of crisis. Thus, in the current scenario, your most important task should be to boost your savings to prepare for the rainy days ahead. If you are a salaried individual, one way you can boost your savings is through the Voluntary Provident Fund.
The VPF provides you the option to make additional contributions to your EPF and earn attractive returns on them.
In this article, let us understand how VPF works and how you can make voluntary contributions to your EPF account.
Introduction to EPF
The Employee Provident Fund is a government-backed investment and tax-saving scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The scheme is managed by the Employees’ Provident Fund Organisation (EPFO). As per rules, you and your employer contribute 12% each of your basic salary and dearness allowance (DA) to your EPF account every month.
The scheme was launched to cater to an individual’s retirement needs, and so it is also called the Voluntary Retirement Fund. Every company with more than 20 employees or salaried individuals above the minimum stipulated amount are mandatorily required to contribute to their employees’ EPF accounts.
What Is VPF?
As the name suggests, VPF is the contribution that employee voluntarily makes over and above the 12% limit of his basic salary contribution in the EPF.
How Much Can You Contribute?
You can contribute or invest additional funds up to 100% of your basic salary and dearness allowance (DA) in your VPF account. The money parked in VPF is maintained separately but enjoys the same treatment as your EPF.
The interest rate on VPF is same as EPF. The current rate of interest on VPF and EPF is 8.5 per cent. This is more than the returns offered by similar investment instruments available in the market. The government recently revised the interest rates for small saving schemes, including the Public Provident Fund (PPF) for the June quarter. As compared to VPF, PPF at present fetches return rate of only 7.1%.
While PPF is also a great investment for the risk-averse investor, increasing your corpus in VPF, however, would help you fetch 1.4% more interest than the PPF. It is also important to note that EPF returns are revised once in a year, unlike other small savings schemes that are revised every quarter.
Taxation And Withdrawals
You can claim tax benefits under Section 80C of the I-T Act for VPF contributions for an amount up to Rs 1.5 lakh. The interest earned is tax-free. You are allowed to make tax-free withdrawals from your VPF on the completion of five years of continuous service under certain conditions.
How To Apply For VPF Account
If you want to open a VPF account, you just need to notify the same to your human resources or salary department about the same. They will give you a VPF registration form to fill for activating your VPF account.
Once your account opens, the amount mentioned by you will be deducted from your salary every month. Do note since it is a voluntary contribution, your employer will not contribute the same amount. The good thing about VPF investment is that it allows you to decrease or increase your contribution as desired.
The fund in VPS is the accumulated money that you can withdraw easily during any cash crunch. Since it is meant for your retirement, try to remain invested for a long time.