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Home » Voluntary Provident Fund (VPF): A Comprehensive Guide to Retirement Savings

Voluntary Provident Fund (VPF): A Comprehensive Guide to Retirement Savings

Understanding Voluntary Provident Fund
Voluntary Provident Fund, abbreviated as VPF, presents an optional investment plan specifically tailored for wage-earning individuals desiring to contribute over and above the requisite 12% of their basic salary and dearness allowance towards their provident fund account. The investment scope is extensive, permitting a maximum contribution encompassing up to 100% of the basic salary and dearness allowance.
It’s worthwhile to note that the interest rate applicable on the VPF mirrors that of the Employees’ Provident Fund (EPF), presently fixed at 8.5% annually. VPF’s unique appeal lies in its security as well as tax efficacy.
As an investment choice, it slots into the EEE (Exempt Exempt Exempt) classification. The implication of this is that contributions, the accrued interest, and withdrawals are all shielded from taxation under Section 80C. Nonetheless, it’s crucial to remember that any withdrawals executed before the completion of a 5-year term become taxable.
VPF further offers an element of flexibility in that it permits partial withdrawals in the form of loans. Additionally, it simplifies the process of transferring funds from one employer to another. However, the option to participate in the VPF scheme is exclusive to salaried employees possessing an EPF account and are employed within organizations that are acknowledged by the Employees’ Provident Fund Organization of India.
The procedure to commence a VPF account is straightforward: an employee simply needs to contact their Human Resources or finance department and fill out a registration form. The existing EPF account will subsequently be utilized as the complementary VPF account.

Features of Voluntary Provident Fund

  • Choice of Contribution: VPF operates on a voluntary basis, enabling employees to select their contribution amount up to the entirety of their basic salary along with the dearness allowance.
  • Employer’s Role: Functioning as an extension of the EPF, the VPF doesn’t require the employer to make any contributions and it doesn’t have a separate account.
  • Withdrawal Rules and Restrictions: The VPF enforces a five-year lock-in period and allows for specific-purpose partial withdrawals after certain years of service. However, withdrawing the entire amount before five years will subject you to certain tax implications.
  • Tax Implications: The VPF adheres to the EEE (Exempt-Exempt-Exempt) tax framework, implying that contributions, interest, and withdrawals post five years are all tax-exempt under Section 80C of the Income Tax Act.
  • Transferring VPF: In the event of switching jobs, it’s possible to transfer your VPF from your old employer to the new one, along with your EPF.

Eligibility and Documentation Requirements for Voluntary Provident Fund (VPF)
To qualify for the Voluntary Provident Fund (VPF), specific criteria need to be met, providing a structured guideline for potential participants:

  • It is a prerequisite to be a salaried employee, receiving monthly remuneration via a designated salary account.
  • An existing EPF account is mandatory, with employment under an organization that enjoys recognition by the Employees’ Provident Fund Organization of India.
  • An expressed interest in making contributions that exceed the obligatory 12% of your basic salary and dearness allowance towards your provident fund account is essential.

Document Required
For the VPF account initiation, certain documents are necessary:

  • An official registration certificate issued by the Ministry of Finance is required. This confirms the company’s registration under the Employees’ Provident Fund organizations, a vital step as only such registered companies are permitted to initiate a VPF account.
  • Forms 24 and 49 need to be provided. These forms carry essential information about the company’s directors and shareholders.
  • In cases where the company is identified as ‘Sdn Bhd’, the memorandum and articles of association must be produced.
  • Lastly, the VPF registration form, readily available from your Human Resources or finance department, is needed. It is on this form that you stipulate the desired contribution amount towards your VPF account.

Interest Rate on Voluntary Provident Fund
The interest rate offered on the Voluntary Provident Fund (VPF) is commensurate with that of the Employee Provident Fund (EPF), with both rates being annually set by the Indian Government and revealed during the yearly budget presentation. As of the fiscal period 2022-2023, the prevailing interest rate on both VPF and EPF stands at 8.1% per annum.

The Calculation of VPF Interest: How Does It Work?
Interest accumulation for the VPF is executed monthly, taking into account the opening balance for the month, which incorporates the accumulated EPF and VPF contributions made by the employee. The process involves dividing the prevailing interest rate by 1200 and then applying this to the month’s opening balance, which determines the interest for that month. Importantly, the accrued interest is transferred to the EPF account once a financial year concludes.

How to Start Voluntary Provident Fund (VPF)
Contributing to a Voluntary Provident Fund (VPF) involves a series of steps. Here’s a simple, step-by-step process to get you started:

  • Get in Touch with Your Employer: The initiation of VPF contributions starts at the workplace. You will need to consult with your employer or the HR or finance team within your company to indicate your desire to start contributing to VPF.
  • Fill Out the VPF Form: The next step is to complete a VPF form, which requires you to provide personal details as well as the contribution amount you plan to make monthly. This amount is deducted from your basic salary and dearness allowance, with the maximum contribution being up to 100% of these.
  • Submit Your Form: Once the form is filled out, you need to submit it to your employer or the HR or finance department. Your specified amount will then be deducted monthly and transferred to your EPF account, which simultaneously serves as your VPF account.
  • Decide When to Start: Enrollment in the VPF can be done at any point within the financial year, unless your employer stipulates otherwise. However, it is recommended to begin at the start of the financial year to optimize tax planning and financial forecasting.
  • Adjusting Contributions: Your VPF contribution amount isn’t set in stone and can be altered by giving written notice to your employer or HR or finance department. Do keep in mind, however, that discontinuing your VPF contribution before the completion of 5 years isn’t an option.

Advantages of Investing in a VPF Scheme
The Voluntary Provident Fund (VPF) comes with numerous benefits that make it an appealing investment option:

  • Tax Savings Galore: VPF operates under the EEE (exempt-exempt-exempt) tax category. This implies that contributions, the interest earned, and withdrawals are all tax-free under Section 80C.
  • Attractive Returns: In addition to being safe, a VPF investment offers lucrative returns, currently pegged at the same rate as the Employee Provident Fund (EPF), which stands at 8.5% per annum.
  • A Secure Bet: With backing from the government and guaranteed interest accumulation, VPF provides a low-risk investment avenue for individuals seeking stability and security.
  • Robust Retirement Portfolio: VPF serves as a potent tool to amass a considerable savings corpus for retirement or achieving various financial goals.
  • Hassle-Free Transfers: One of the key advantages of VPF is the ease with which funds can be transferred from one employer to another when an individual switches jobs.
  • Flexible Withdrawals: VPF also offers the flexibility of partial withdrawals in the form of loans, along with the option for complete withdrawals after a period of five years.

Tax Advantages of VPF
Voluntary Provident Fund (VPF) provides employees with a variety of tax benefits:

  • Tax Advantage: The money you put into your VPF qualifies for tax relief under Section 80C of the Income Tax Act of 1961.This applies up to an annual limit of Rs. 1.5 lakh.
  • Tax-Exempt Interest: The interest accumulated from the VPF investment is free from tax due to the scheme’s EEE (exempt-exempt-exempt) category status.
  • Tax-Free Withdrawals (Conditions Apply): Withdrawals from the VPF scheme are tax-free given that the individual has completed five years of continuous service.

However, it’s essential to be aware of the potential tax consequences if withdrawals are made prior to completing five years of service:

  • Taxable Withdrawals: Any withdrawals made from the VPF before the completion of five years of service are treated as income and are taxed according to the individual’s applicable tax slab rate.
  • Implications of TDS: For premature withdrawals exceeding Rs. 50,000, a tax deduction at source (TDS) is applicable. The rate is 10% if the Permanent Account Number (PAN) is provided and a significant 34.608% if PAN details are not furnished.
  • Avoiding TDS: If an individual’s income falls below the taxable limit, they can evade TDS by submitting either Form 15G or Form 15H.

How to withdraw from a VPF Account ?
Retrieving funds from your VPF account involves several steps. Here’s your guide to the withdrawal process:

  • Complete Form 31: This form, titled ‘Application for Advance from Provident Fund’, is your first step towards withdrawal. You can source this document from your employer or download it from the Employees’ Provident Fund Organisation (EPFO) portal.
  • Submission of Form and Documentation: Upon filling out Form 31, you need to submit it, accompanied by a set of self-attested documents. These include bank details, your PF number, your postal address, and a cancelled cheque, which are to be handed over to your employer.
  • Specify the Withdrawal Details: Indicate the reason and amount for your withdrawal on the form. Common reasons for withdrawals include financial distress, medical emergencies, funding your children’s higher education, or making a down payment for a house or land.
  • Wait for Approval: Once your application is submitted, you need to wait for approval from your employer and the EPFO. Following approval, the specified withdrawal amount will be deposited into your bank account, typically within a 15-20 day timeframe.

However, it’s important to be aware of the tax implications associated with withdrawing before the completion of 5 years. Total withdrawal of your funds is permissible only after resigning or retiring from your employment.

Comparing VPF with Other Investment Schemes
When deciding the best investment for your future, it’s beneficial to compare various schemes. Below, we look at VPF in comparison to the Public Provident Fund (PPF), the National Pension Scheme (NPS), and Equity-Linked Savings Scheme (ELSS).

  • VPF vs PPF: Both VPF and PPF are provident fund schemes that provide tax benefits under Section 80C and maintain EEE (Exempt-Exempt-Exempt) status. The critical difference lies in the eligibility criteria; VPF is only available to salaried employees already enrolled in the EPF, whereas PPF is accessible to all, including self-employed and non-salaried individuals. VPF offers a flexible contribution limit, while PPF has a minimum contribution of Rs. 500 and a cap of Rs. 1.5 lakh per annum. As for the lock-in period, VPF mandates five years, while PPF extends it to 15 years. VPF allows limited partial withdrawals under specific conditions, while PPF permits withdrawals from the seventh year onwards for any purpose.
  • VPF vs NPS: VPF and NPS both cater to retirement savings and offer tax benefits under Section 80C. VPF, however, is debt-oriented, investing primarily in government securities with fixed returns. Conversely, NPS is market-linked, diversifying investments across equity, corporate bonds, and government securities, thereby generating variable returns based on market performance. VPF contributions are voluntary and flexible, while NPS mandates a minimum contribution of 10% of the basic salary and dearness allowance for central government and some state government employees. VPF comes under the EEE category, whereas NPS falls under EET, meaning the maturity amount is partially taxable.
  • VPF vs ELSS: Both VPF and ELSS are tax-saving schemes eligible for deductions under Section 80C. VPF, however, is a debt scheme investing in government securities, while ELSS is equity-oriented, investing primarily in the stock market. VPF allows employees to contribute up to 100% of their basic salary and dearness allowance, while ELSS has no maximum investment limit but only allows a tax deduction of up to Rs. 1.5 lakh per annum. The lock-in period for VPF is five years, three years less than that of ELSS.
FeaturesVPFPPFNPSELSS
EligibilitySalaried Employees with EPFEveryoneCentral/State Govt Employees & OthersEveryone
Nature of SchemeDebt-OrientedDebt-OrientedMarket-LinkedEquity-Oriented
Interest Rate/ReturnsFixedFixedVariableVariable
Contribution LimitFlexibleMin Rs. 500 – Max Rs. 1.5 Lakh/AnnumMin 10% of Basic Salary & DANo upper limit, Tax deduction upto Rs. 1.5 Lakh/Annum
Tax BenefitsEEEEEEEETEET
Lock-In Period5 Years15 YearsUntil 60 Years3 Years
WithdrawalsPartial (Conditions Apply)Partial (From 7th Year Onwards)Partial (Conditions Apply) & 60% Lump Sum at 60 YearsAfter 3 Years

FAQs Voluntary Provident Fund Scheme

What exactly is a Voluntary Provident Fund (VPF)?

The Voluntary Provident Fund (VPF), also known as the Voluntary Retirement Fund, is an investment scheme that offers salaried individuals an opportunity to make contributions beyond the obligatory 12% of their basic salary and dearness allowance into their Provident Fund account. These voluntary contributions can be up to 100% of their basic salary and dearness allowance. This scheme is a popular choice among employees as it yields the same interest as an Employee Provident Fund (EPF), which currently stands at 8.5% per annum.

What are the criteria to be eligible for a VPF?

VPF is exclusively available for salaried employees. The eligibility criteria involve holding a current Employees’ Provident Fund (EPF) account and being employed under an organization acknowledged by the Employees’ Provident Fund Organization of India. Moreover, the employee should willingly choose to make contributions beyond the mandatory 12% of their basic salary and dearness allowance to their Provident Fund account.

What documents are needed to apply for a VPF?

To apply for a VPF, the required documentation includes a certificate of registration from the Ministry of Finance as only companies registered under the Employee Provident Fund organizations can open a VPF account. Also, forms 24 and 49 detailing the company’s directors and shareholders, along with the Memorandum and Articles of Association in case of an ‘Sdn Bhd’ company. Lastly, a VPF registration form which can be obtained from your HR or finance team, where you can specify your desired contribution amount.

As a voluntary investment plan, VPF provides numerous benefits such as being a safe, low-risk investment backed by the government. It is also a tax-efficient option falling under the Exempt-Exempt-Exempt (EEE) category, implying that the contributions, interest earned, and the withdrawals are all exempted from tax under Section 80C of the Income Tax Act. However, withdrawals before five years of service completion are taxable. The VPF also permits partial withdrawals in the form of loans and seamless transfer of funds between different employers.

What is the current rate of interest for VPF?

The VPF interest rate is consistent with that of the EPF rate, which is annually established by the Indian Government. For the fiscal year 2020-21, the EPF (and hence the VPF) interest rate has been fixed at 8.5%.

How is the interest calculated for VPF?

The interest on the VPF is calculated on a monthly basis, but the accumulated interest is credited to your account only at the end of the financial year. The calculation considers the lowest balance in your account between the fifth day and the last day of each month.

What are the tax implications for VPF?

The VPF comes under the EEE (Exempt-Exempt-Exempt) tax category, meaning that the principal amount, the interest earned, and the maturity amount are all exempt from tax under Section 80C of the Income Tax Act. However, if the funds are withdrawn before five continuous years of service, the withdrawn amount becomes taxable. Further, if the withdrawn amount exceeds Rs. 50,000 before the completion of five years of service, a TDS (Tax Deducted at Source) is applicable at 10% if the PAN is furnished or 34.608% if the PAN is not furnished.

Can VPF be withdrawn before its maturity?

Yes, VPF can be prematurely withdrawn, subject to specific conditions and tax implications. One can withdraw up to 90% of their VPF balance after they reach 54 years of age or one year before retirement, whichever is later. Partial withdrawals are allowed for specific purposes like marriage, education, medical treatment, house purchase or construction, provided a certain number of years of service have been completed. But if VPF is withdrawn before five years of service, it becomes taxable as mentioned above.

Can VPF be transferred from one employer to another?

Absolutely, it’s possible to move your VPF from one employer to another when you switch jobs.. You would need to fill out Form 13 and submit it either to your former employer or directly to the EPFO online. The transfer process may take up to 20 days.

Is it possible to discontinue or change VPF contributions?

Yes, you have the freedom to stop or modify your VPF contributions at any point during the fiscal year by informing your employer. However, once the VPF contribution is halted, you cannot restart it until the beginning of the next fiscal year. Also, you cannot withdraw your VPF balance until you have completed five years of service or have resigned or retired from your job.

How can the VPF balance be checked?

The VPF balance can be checked through several means such as the EPFO website, the UMANG app, by sending an SMS, or through a missed call service. Additionally, the EPF passbook, which also details the VPF contributions and interest earned, can be downloaded.

How does VPF compare with other investment options like PPF and NPS?

VPF and PPF (Public Provident Fund) are similar in terms of tax benefits and interest rates. However, VPF is available only to salaried employees with an EPF account, whereas PPF is available to all, including self-employed individuals. VPF and NPS (National Pension System) are both retirement saving schemes but differ in risk profile, tax benefits, lock-in period, and withdrawal rules. Depending on individual income, risk appetite, and financial goals, an informed choice can be made between VPF, PPF, and NPS.

What are the steps to close a VPF account?

To close a VPF account, you need to apply for withdrawal, which can be done online or offline. For offline withdrawal, you need to fill Form 19 and submit it to your regional EPFO office. For online withdrawal, you need to visit the EPFO website, log in with your UAN and password, select the ‘Claim’ option, and follow the provided steps.

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