Voluntary Provident Fund calculation: Salaried individuals working in an establishment covered by the Employees Provident Fund Organisation (EPFO) have an excellent opportunity to save for their retirement in a safe and tax-free way.
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While every employee and employer is required to make a mandatory contribution towards the former’s EPF account, employees can voluntarily contribute a higher amount to accumulate a larger retirement corpus.
As per EPF rules, the employee has to contribute 12% of his basic pay+dearness allowance towards the provident fund account. Employers are required to contribute a matching amount of which 8.33% goes towards the employee’s EPS account and the remaining 3.67% goes to his/her EPF account (check more details here).
However, employees can voluntarily contribute a higher amount by submitting a request to the HR Department. Such Voluntary Provident Fund (VPF) contribution earns the same interest as the mandatory EPF contribution, which was 8.15% for FY 2022-23. The average Provident Fund interest rate remains around 8%.
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EPF contribution of up to Rs 1.5 lakh in a financial year qualifies for tax deduction under Section 80C. An employee can, however, contribute up to Rs 2.5 lakh in a year towards VPF without attracting extra taxes. There is also no tax on withdrawals and maturity amount from the provident fund account.
How much can you save?
Compound interest calculation shows that a voluntary contribution of Rs 2.5 lakh/ year (Rs 20,833 per month) towards VPF will generate a corpus of around Rs 3 crore (assuming 8% interest) in 30 years.
In 25 years, the total value of the PF corpus will be around Rs 2 crore. In 20 years, the total accumulated fund will be around Rs 1.2 crore.
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Should you invest in VPF?
Experts say that employees can increase their VPF contribution if they are comfortable with locking in their money for a longer period.
“Employees should consider their current financial situation before increasing VPF contributions, as the additional contributions could impact short-term liquidity needs,” says CA Amit Gupta, MD, SAG Infotech.
