“VPF or Voluntary Provident Fund is a contribution that you make towards your PF account over and above the mandatory EPF contribution”
Most of India’s taxpayers are salaried individuals, and EPF (Employee Provident Fund) forms a mandatory salary component of almost all employees.
It helps them secure funds for their retirement, and since EPF is government-backed, the investment becomes risk-free. Moreover, the interest rate offered has been over 8% for the past decade.
Now, an employee can contribute a maximum of 12% of his basic pay towards EPF. But because of the interest rate being higher than other low-risk investments like FDs and PPF, many employees would want to hike their EPF contributions, and this can be done by contributing to VPF.
Here are some key considerations:
- There’s no upper limit to the contribution amount towards VPF and hence, you can contribute up to 100% of your basic salary.
- It is a risk-free investment and is backed by the GOI.
- If you contribute towards VPF, there’s a lock-in of 5 years. This means that you can withdraw the investment only after 5 years.
- Interest is earned at the same rate as in case of EPF.
The interest rate is 8.25% p.a. for FY 2023-24. The interest earned is deposited to your EPF account on 1st April of every year.
What are the tax benefits?
VPF is a EEE (Exempt-Exempt-Exempt) scheme, which means, you can claim a deduction on your contribution amount, and the interest accrued along with the maturity amount is tax-free.
- Your contribution towards VPF is eligible for a tax deduction of up to ₹1.5L under section 80C. However, this would also include your EPF contribution.
- The interest that you earn would be tax-free. However, if your total contribution, including EPF and VPF, exceeds ₹2.5 lakh in a financial year, the interest earned on the excess contribution would become taxable.
- If you withdraw the funds after 5 years, there will be no tax on the maturity amount.
What is the maximum VPF contribution to earn tax-free interest?
As mentioned previously, if your total contribution including EPF and VPF, exceeds ₹2.5 lakh in a financial year, the interest earned becomes taxable. This limit only includes your, i.e., employee’s contribution and not the employer’s contribution.
So, the aim should be to keep the investment below this threshold. The first step should be to determine your annual contribution to EPF. Once you are aware of the amount, the same must be subtracted from ₹2.50 lakh. This will let you know how much you can invest via VPF.
For example, if you are earning ₹80,000 per month as a basic salary, the maximum EPF contribution comes to ₹9,600 per month (12% of Rs 80,000), and this would mean that your yearly contribution is ₹1,15,200.
In this case, the maximum amount that you can invest in VPF to earn tax-free interest would be ₹1,34,800 (₹2,50,000 - ₹1,15,200).
Have Questions? Ask away!