EPFO: The Employees’ Provident Fund Organisation (EPFO), which manages the investment-cum-retirement scheme EPF for employees working in the organised sector, is currently providing an interest rate of 8.25% on deposits. As per EPFO norms, employees have to deposit 12% of their basic salary every month towards his retirement corpus, while their employers match this with equal contribution. Of the employer’s contribution, 8.33% goes towards Employee’s Pension Scheme (EPS) and 3.67% is added to EPF deposits.
EPFO also allows employees to contribute more by opting for Voluntary Provident Fund (VPF). An employee can ask his or her employer to deduct beyond the mandatory 12% contribution. The maximum VPF contribution can be up to 100% of basic salary and dearness allowance with the same rate of interest as on original contribution.
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VPF is an extension of EPF, helping employees to enhance their retirement savings and get the same rate of interest as they get on original PF deposits. Like EPF, contributions to a VPF are also get compound interest benefit as returns are reinvested year after year. VPF subscribers must note that withdrawals made before completing a minimum tenure of five years are subject to taxation. VPF funds are also disbursed, just like EPF, upon retirement, resignation, or in the event of the account holder’s death, to the nominee. EPFO does allow withdrawal of VPF prematurely in financial needs such as medical expenses, marriage, education, or property purchases.
Voluntary Provident Fund tax treatment:
Previously, all interest earned on EPF contributions was tax-free. This rule, however, was changed latter and now interest earned on employee contributions up to Rs 2.5 lakh in a year remains tax-free. This Rs 2.5 lakh limit covers both EPF and VPF.
EPF contributions up to Rs 1.5 lakh per financial year are eligible for tax deductions under Section 80C. However, employees can contribute up to Rs 2.5 lakh annually towards VPF without incurring additional taxes. Withdrawals and the maturity amount from the provident fund are also tax-free.
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How much can you save by investing in EPF and VPF for 30 years?
Assuming that you start investing a total of Rs 2.5 lakh per year (Rs 20,833 per month) in EPF and VPF, you will get around Rs 3.3 crore over 30 years at an annual interest rate of 8.25%. Over 20 years, your corpus would be Rs 1.27 crore.
To sum up, it can be said that VPF can be beneficial only when you stay invested for long and let your corpus be bigger with the compounding magic. But if you lack discipline and keep using your PF deposits every now and then for various reasons, you won’t be able to reach your financial goal. Another aspect of contributing more from your salary towards your retirement goal is that you might have to make some hard adjustments in your financial planning to save more money for VPF contribution.
