VPF (Voluntary Provident Fund): Benefits, Enrollment Process & Withdrawal

Slow dance your way into retirement with Voluntary Provident Fund. Employees who make a VPF contribution enjoy benefits greater than the EPF contributions. This provident fund scheme is backed by the Government of India and allows you to choose the PVF percentage of the salary you wish to contribute. If you’re not well versed with VPF contributions, this blog will guide you step by step through VPF meaning, interest rates, rules, features and benefits.

What is VPF – Voluntary Provident Fund?

Employees can voluntarily pay a portion of their salary to their Employee Provident Funds (EPFs) through the Voluntary Provident Fund (VPF). The VPF is a retirement planning and investing tool backed by the Government of India. An employer is required to contribute 12% of the employee’s basic income to their EPF, while the employee in question may contribute up to 100% of their wage. 

The employees’ monthly contributions are optional, and they can choose to increase the amount they contribute to each Provident Fund. The programme offers a secure substitute for workers who want to increase their retirement savings beyond the minimum required proportion of their pay. It should be noted that the sum placed has a five-year lock-in term. 

Features & Benefits of Voluntary Provident Fund (VPF)

Besides savings, the VPF also unlocks several other benefits for employers, which account for additional savings. Some of the VPF benefits are:

Tax Exemption

The investment will be tax-exempt since the VPF falls under the EEE category. The accumulated sum would qualify for tax exemptions if a portion or the entire amount was removed after the maturity period.

Application Process

The application process for creating a VPF account is pretty straightforward. Employees can initiate the process by meeting their HR. Since the EPF and VPF accounts are not mutually exclusive, the process doesn’t take very long.

Security

This investment programme offers investors a safe way to participate in a programme that is backed by the government. It spares the employee the hassle of researching and selecting among several investment possibilities which are less reliable and far more subject to volatility because of unforeseen causes. A sovereign state’s guarantee of cumulative contributions and interest makes it a feasible alternative for investors looking to build a portfolio with minimal risk and high returns.

Interest

For its investors, the VPF programme provides a competitive interest rate. The government set the yearly rate of interest on EPF at 8.1% for the fiscal years 2022–2023. The VPF offers the highest interest rate and tax exemption of all the fixed investment alternatives.

Portability

Transferring the VPF account while changing jobs is not a complicated process. The Indian government introduced the Universal Account Number (UAN), which guarantees depositors’ simple portability and transparency of their provident fund.

Retirement Planning

The investor has the flexibility to plan for their retirement, thanks to the VPF. The employee has a lot of freedom to design their retirement plan as the EPF payments are made at the account holder’s discretion. The programme provides a secure haven for long-term investors to deposit their life’s investments.

Voluntary Provident Fund (VPF) Eligibility Criteria

To enjoy the VPF tax benefits and make contributions, an employer needs to meet the following eligibility criteria:

• The person must be employed in the organised sector as a salaried employee.
• Whether the organisation has EPF accounts for its employees determines whether the employee is qualified to apply for VPF.
• Organisations with more than 20 employees are required to keep EPF accounts to abide by the rules established by the government.
• If a business has fewer than twenty employees, the employer decides whether to set up EPF accounts for the workers. An employee is not permitted to voluntarily apply for a VPF account then.
• Unorganised sector employees are not eligible to open VPF accounts.
• The VPF scheme is open to salaried employees who receive monthly payments.

Documents Required to Open Voluntary Provident Fund Account

To guarantee a smooth application procedure, the employee who wants to contribute to the VPF account must keep the documentation listed below:

• Form 44
• Form 29
• Ministry of Finance accredited Company’s Registration Certificate.
• A detailed overview of the company’s profile.
• The Memorandum and Articles of Association must be presented if the organisation is an ‘Sdn Bhd’.
• Business Registration Certificate.

To request a modification in the VPF contributions, applicants must contact their HR or the relevant department of the business. 

Voluntary Provident Fund Interest Rates

The following table features the VPF interest rate for the past five years:

How is VPF Interest Rate Calculated with Example?

Interest on VPF is calculated on a monthly basis as an opening balance of both EPF and VPF. It is to be noted that the opening balance of the interest would be zero as it is the first month of the VPF contribution. A VPF interest rate is divided by 1200 and multiplied by the opening balance for the month. The following VPF contribution example will clear out any doubts.

Example

For instance, your employer provides you with a monthly salary of INR 30,000. Your EPF account requires a mandatory contribution of 12% of your salary. Abiding by the VPF rules, you make a contribution of 8% towards your VPF account. The employer makes a 3.67% or INR 15,000 contribution towards your EPF account. The VPF interest rate for 2020 is 8.5% p.a.

The Interest on VPF can be Calculated as Follows:

 The interest earned by you is INR 3,062. Here, it was believed that the salary remained constant throughout the year. 

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Tax Benefits Available Under a Voluntary Provident Fund

The VPF falls within the Exempt-Exempt-Exempt or EEE category, which guarantees that the investor’s contributions will be tax-exempt in nature. The interest on the VPF contribution is tax-free. Under Section 80C of the Income Tax Act, the qualifying employee’s VPF payments would be eligible for annual tax deductions of up to INR 1.5 lakhs. The interest earned would be subject to tax if the government sets the interest rate at or above 9.5%.

The contributor enjoys the VPF tax benefit if they do not make a withdrawal from their VPF account until it hits maturity. Under the EEE category, no wealth tax is levied on the amount.

Voluntary Provident Fund Rules and Regulations

The voluntary PF contribution has the following rules and regulations:

• The VPF scheme only accepts applications from paid workers who work for companies that have been approved by the Employee Provident Fund Organization (EPFO).
• The VPF account is not a closed one. The employee’s EPF account receives a direct deposit of the additional contributions made under the VPF programme.
• To apply for the VPF programme, a contributor must have an EPF account.
• Contrary to the EPF, the voluntary PF contribution is optional, as the name implies.
• The Indian government establishes and controls the VPF interest rate at the start of the fiscal year. The interest rate that remains constant throughout the year changes each year.
• At the time of maturity, contributions made to the fund may be withdrawn. Taxes won’t apply to the accrued amount.
• The VPF contribution can be made with 100% of the basic salary and dearness allowance.
• If the account holder passes away suddenly, the specified nominee will receive the accrued money.
• The applicant for the VPF scheme is not permitted to withdraw their investment before the five-year maturity period.
• A partial withdrawal made against the VPF account will be considered a loan.
• If a withdrawal is made before the maturity date, the amount will be taxable.

Important Voluntary Provident Fund Withdrawal Rules

There is a provision for withdrawal of VPF if the employee decides to take the accrued money out before the five-year lock-in term. The money taken out of the provident fund would then not be exempt from taxes. The affected person must pay the wealth tax imposed on the amount withdrawn.

For the following circumstances, the provident fund holder is qualified for withdrawal:

• Repayment of loans on real estate purchased by the account holder.
• Medical care for the patient or their family.
• Wedding-related costs.
• Construction and renovation of their own homes.

The depositor must submit Form 31 to their employer to withdraw. The paperwork must be accompanied by documents attesting to information such as the depositor’s address, EPF number, and bank account information. The collected funds from each EPF would be sent to the depositor’s bank account after the request is approved.

FAQ’s about Voluntary Provident Fund (VPF)