Voluntary Provident Fund (VPF) is almost the same as the Employees’ Provident Fund (EPF). The only difference between the two is of choice: in VPF, the employer is under no obligation to match his/her employees’ contribution towards the fund. In the EPF, the employer has to mandatorily match the employees’ contribution to the fund.
How does VPF work?
VPF works the same way as the EPF. A part of your salary is invested into the fund, which you cannot withdraw until 5 years. Your contribution fetches interest that is added to your invested money. This way your capital keeps growing and reaches a substantial value if you withdraw late. The interest earned by the VPF is decided by the Government of India.
What are the key benefits of VPF?
Investing in VPF is beneficial in tens of different ways, but here are some of the premier reasons why you consider investing in this fund.
- Tax benefits
Taxes are a real pain and all good investors choose investment tools that offer them maximum tax benefits. VPF is great in this context, as all contributions and interests in this scheme are exempt from tax, according to Section 80C of the Income Tax Act, 1961. While employees are eligible for tax benefits of up to ₹1.5 lakh, interest earned over 9.50% per annum will be taxable.
- Risk-free scheme
Another common thing that retail investors are often worried about is security and risk. They ideally want to stay away from investment tools that are too volatile or there’s a risk of severe losses or fraud. VPF is an excellent option to consider since the fund is operated and backed by the Government of India itself. So, there’s no risk involved, with the money parked in the safest place in the country.
- Decent returns
VPF is one of the highest-paying investment schemes in the country. Historically, it has given over 8% per annum in returns, which is well over the returns earned through other schemes. Currently, the scheme is earning investors 8.50% per annum as interest. And remember: the amount is tax-free.
Can you withdraw prematurely from VPF?
Yes, absolutely! VPF allows you to withdraw partial or the entire amount. Try not to, though, as withdrawals made before the maturity period the fund, which is 5 years, attract tax. To withdraw from the VPF, you need to fill up Form-31 and then submit it with self-attested copies of your documents. The most common reasons why people withdraw money prematurely from VPF are:
- Payments of your, or your kin’s, medical bills.
- To cover the cost of higher education or marriage.
- For the construction of your house or for buying a new one
Q: Who can invest in VPF?
Ans: All employees on a company’s payroll are eligible to open a VPF account.
Q: How are VPF and EPF different from each other?
Ans: VPF is an extension of EPF. In an EPF account, you need to mandatorily give 12% of your Basic Salary and Dearness Allowance towards the fund. In a VPF, it is a voluntary contribution.
Q: Who are ideal candidates for a VPF account?
Ans: Anyone who is looking to invest in a long-term financial instrument is an ideal candidate. VPF accounts are best for people nearing retirement and/or are looking out for a safe pension fund option.