A Voluntary Provident Fund, also known as VPF, is an employee voluntary fund contribution beyond the mandatory 12% toward his/her existing EPF account. An employee is eligible to contribute up to 100% of his/her basic salary as well as his/her dearness allowance, and the 8.5% interest earned is also at the same rate as the EPF. As the name suggests, neither employers nor employees need to voluntarily contribute to the fund and are not under any obligation to do so.
However, note that once this contribution is chosen in the voluntary provident fund, you cannot choose to terminate or discontinue it before the 5 year base tenure is completed. Being an extension of the employee provident fund, all members of the voluntary provident fund are also members of the Employee Provident Fund Organisation (EPFO) and are also available to only salaried employees.
Benefits of the Voluntary Provident Fund
The various benefits for the Voluntary Provident Funds include:-
VPF are safe:
As this scheme is directly managed by the Government of India with a fixed interest accrual, voluntary provident funds are considered as a risk-free investment option relative to other options including equity markets and real estate.
VPF give high returns:
The interest rates are decided by the Government of India at the beginning of every financial year. Currently, the interest rates are at 8.5% per annum under the voluntary provident fund scheme.
Tax benefits of VPF:
Another point to note is that any contributions up to 1,50,000 rupees per annum and any interest on it is exempt from tax under Section 80C of the Income Tax Act, 1961. This is also a factor that generates higher returns over a longer term.
Easy account opening process of VPF:
The process of opening a voluntary provident fund account is not complicated at all. An employee just has to approach his boss or HR head and ask him/her to raise a request for a contribution in the voluntary provident fund via a registration form.
Easy transfer of funds of VPF:
The voluntary provident funds can be transferred upon changing jobs as well.
How to withdraw from the Voluntary Provident Fund?
The Voluntary Provident Fund does permit partial withdrawals as loans with the possibility of complete withdrawals in certain cases as well. If this withdrawal takes place before the minimum tenure of five years, the tax will be applicable on the accumulated maturity amount. The final maturity amount is paid to the employee once he/she resigns or retires. In case of the account holder’s untimely death, the assigned nominee gets possession of the accumulated amount from the voluntary fund.
This fund is also much more convenient as the accumulated money can be withdrawn at any given time, compared to the EPF. One can always rely on their voluntary provident fund in case of an unforeseen financial emergency. This fund amount can be withdrawn for many reasons including:- payments of medical bills for himself/herself or their families, marriage of self or of their children, higher education of children, house construction or property purchase etc.