Is VPF a good choice for Retirement Saving?

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VPF is a voluntary increase in the contribution towards PF, with no matching contribution from the employer. Since the amount is deducted even before the salary is paid, it is a disciplined way to invest. The investment earns a fixed interest each year, as declared by the government. The contributions are also eligible for deduction under Section 80C of the Income Tax Act, up to a maximum of 1.5 lakh each year.

You can decide for the VPF Voluntary Provident Fund if you are searching for a long-term investment opportunity with good yields and a low potential risk. This scheme, operated by the Government of India, provides participants with tax benefits. The Voluntary Provident Fund (VPF) is a scheme coming under the conventional savings scheme of the Provident Fund. That being said, under the VPF scheme, the contributor agrees, on a monthly basis, on the amount of the fixed contribution to the scheme. VPS enables you to deposit more in your EPF account, and it’s voluntary, as the title implies. The scheme does not comprise the required 12 percent made by the employee towards EPF.

Key benefits of VPF

As VPF falls under the category of Exempt-Exempt-Exempt (EEE). Employees can therefore reap tax savings and, in the long term, earn a substantial sum of money by contributing to the VPF.

The key advantages of a VPF account are described below:

  • There are no uncertainties inherent in participating in the scheme as the scheme is run by the Indian Government. It is very worth it to go for a VPF portfolio relative to other long-term investing opportunities offered by private entities.
  • The rate of interest is 8.50 percent p.a. under the VPF scheme. The interest provided by the contributions is also tax-deductible.
  • The procedure for opening a VPF account is quite clear. Through submitting the registration form, employees can notify their employer’s accounting department and request them to open a VPF account. The existing EPF account will also serve as an account for the VPF.
  • In the event that people change their employers, it is very easy for them to switch the old company’s VPF account to the existing one.

Benefits of VPF

The VPF account comes under the Exempt-Exempt-Exempt (EEE) category. Therefore, employees can enjoy tax benefits and earn a large amount of money in the long-run by investing in the VPF. The main benefits of a VPF account are mentioned below:

Safe option to Invest: Since the scheme is operated by the Indian Government, there are no risks involved in investing in the scheme. Compared to other long-term investment options offered by private organisations, it is very safe to invest in a VPF account.

High rate of Interest: Under the VPF scheme, the rate of interest is 8.50% p.a. The interest that is generated from the contributions is also exempt from tax.

Application process is easy: The process to open a VPF account is very simple. Employees can contact their employer’s finance team and request them to open a VPF account by submitting the registration form. The current EPF account will act as the VPF account as well.

Transfer process is simple: In case employees change their jobs, it is very simple for them to transfer the VPF account of the old company to the new one.

Lock-in period of VPF contributions

Since VPF contributions are deposited in the EPF accounts of employees, the VPF contributions too will have the same lock-in period as that of the EPF. One can withdraw from their on VPF contributions if he or she is unemployed for more than two months or when they retire.

Higher Interest Rate

VPF has the same interest rate as EPF, which the government determines every fiscal year. The Indian government announces the EPF/VPF interest rate every year, and it is subject to adjustment. The EPF interest rate is currently 8.5 percent. If compared to the other debt-saving instruments like 5-year bank FDs, Senior Citizen Savings Scheme, National Savings Certificate, Public Provident Fund and Pradhan Mantri Vaya Vandana Yojana (PMVVY), VPF provides you the highest interest rate along with tax benefits.

Interest rate of a VPF

Financial YearVPF rate of interest p.a.(%)

Tax Benefits available under a VPF

When it comes to various investment options in India, the VPF account is considered among the best. Under Section 80C of the Income Tax Act, 1961, employees are eligible for tax benefits of up to Rs.1.5 lakh. The interest that is generated from these contributions is also exempt from tax. However, in case the rate of interest is more than 9.50% p.a., the amount will be taxable.

Flexible Withdrawal Option

It’s worth noting that VPF withdrawals made before completing five years of continuous service are taxable. In the case of an unexpected and immediate financial situation, the money in the VPF account can be withdrawn, according to certain restrictions. A depositor’s VPF balance can be withdrawn for a variety of purposes, namely medical emergencies, children’s higher education or marriage, the purchase/construction of a house or other residential plot, and the repayment of a home loan.

Shorter-Lock in Period

VPF is regarded as one of the best investment opportunities, primarily for those searching for long capital growth. Contributions to a VPF account have a 5-year maturity period, according to Voluntary Provident Fund withdrawal regulations. As a result, a person cannot withdraw funds from their Voluntary Provident Fund until the end of the 5-year period without incurring penalties. The withdrawal is tax-free, as long as it is not withdrawn before the 5-year maturity period.

Why VPF is a Good Investment Option for Retirement Planning

VPF gives higher returns than PPF, bank fixed deposit and 5-year NSC or national savings certificate. While PPF and 5-year NSC give 8 per cent return at the current rate, fixed deposits attract an even lower rate of 7.5 per cent. That is why it (VPF) can be a secured investment avenue for maximising the retirement benefits. 

  • This scheme is a very good investment option for the private sector employees in their 40s and with this increase in the rate, it eve becomes more lucrative.  VPF is a risk-free and tax-free investment option. Even young employees can put money into this to maximise their retirement benefits. Under this scheme, employees can contribute voluntarily in addition to the EPF contribution.
  • VPF is a great retirement planning tool and therefore, it should be there in the debt portfolio of all salaried employees.  VPF scheme is flexible and convenient, as VPF contribution amounts are deducted from salary.  
  • VPF should be in employees’ portfolio as early as possible early as this will help them reap better retirement benefits. However, employees at a young age may keep more high-return investments like mutual funds and equities in their portfolio.
  • VPF comes with withdrawal restrictions and full withdrawal is possible only at the time of retirement. If an account holder regularly contributes to this scheme for five years then s/he gets tax exemption.