The Voluntary Provident Fund (VPF) is an extension of the Employees’ Provident Fund (EPF). It allows employees to make additional voluntary contributions to their EPF accounts over and above the mandatory contribution.
The EPF requires a mandatory contribution capped at a certain percentage of the basic salary (12 per cent), while the VPF permits an individual to contribute more than the stipulated amount on a voluntary basis.
The VPF is, however, solely an employee contribution and does not involve any equal contribution by the employer.
So should you go for voluntary contribution to your EPF? Let’s explore.
Key Benefits Of Voluntary Provident Fund
Here are some of the benefits of Voluntary Provident Fund.
Enhanced Retirement Corpus: By contributing more than the mandatory EPF amount, individuals can amass a larger retirement corpus. At present, VPF offers 8.15 per cent, which is on the higher side for a debt instrument.
Investment Limit: There is no maximum or minimum VPF contribution limit per year.
“An individual can also contribute 100 per cent of his/her monthly income (salary + dearness allowance) towards VPF,” says Archit Gupta, founder and CEO, Clear, a tax portal.
Low Risk: VPF is considered a low-risk investment since it is managed by the government and offers a guaranteed rate of interest. The interest rate for EPF and VPF is the same and is announced separately for every financial year.
Tax Implications Of Voluntary Provident Fund
Here are the tax implications on Voluntary Provident Fund contribution.
Tax Benefits On Contributions: Similar to the EPF, contributions made to the VPF are eligible for tax deductions under Section 80C of the Income-tax Act, 1961, subject to the maximum limit of Rs 1.5 lakh per financial year.
Taxation Of Interest: VPF comes under the Exempt Exempt Exempt (EEE) category. Thus, the VPF contribution, interest, and principal and maturity amount are tax-free. However, if the VPF amount is withdrawn within five years of investing, it will be liable to tax.
“The withdrawal amount is tax-free only when it is withdrawn after five years of investment,” says Gupta.
Taxation After A Certain Investment Limit: As per Union Budget 2021, if an employee’s combined annual contribution to EPF and VPF exceeds Rs 2.5 lakh, the interest earned on the excess amount will become taxable. For example, if an individual contributes Rs 2 lakh to EPF and Rs 1.5 lakh to VPF in a financial year, the total contribution will be Rs 3.5 lakh (which is above Rs 2.5 lakh limit), and the interest earned on the excess Rs 1 lakh will be subject to taxation.
Should You Invest In VPF For Tax Benefits?
If you have not exhausted the Rs 1.5 lakh limit under Section 80C, you may invest in VPF to the maximum limit and claim tax deductions.
However, remember that while you can invest an amount higher than Rs 1.5 lakh, tax deductions will only be available up to Rs 1.5 lakh. Also, a part of the Rs 1.5 lakh will already have been used up due to your EPF contribution and other eligible deductions under Section 80C.
Also remember that you would need to opt for the old tax regime to be eligible for these tax benefits. Hence, making an additional contribution to VPF to increase your tax savings would only make sense under certain conditions.