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Voluntary Provident Fund: VPF offers higher returns, often higher than fixed deposits or regular savings accounts.
VPF interest rates are linked to EPF rates, which are updated by the government every year. (Representative image)
Saving for retirement is one of the best financial moves you can make while earning a regular income. Investing in avenues that offer good returns can significantly increase your retirement corpus. Among the various options available, catering to different risk profiles, Provident Fund (PF) stands out for its safety and sovereign guarantee. This article will take you to understand Voluntary Provident Fund.
It has different varieties in India. Provident Funds Based on Employment Category:
General Provident Fund (GPF):
General Provident Fund is a savings and retirement scheme specially designed for government employees. It is not open to non-government employees, who cannot contribute to the GPF account.
Public Provident Fund (PPF):
Unlike General Provident Fund, PPF is a savings scheme available to anyone, irrespective of the type of employment. It allows individuals to lock in their contributions for a longer period of time, offering a safer option for accumulating wealth.
Also, provident funds are classified as either mandatory or optional. Employees Provident Fund (EPF) Being a compulsory scheme, and Voluntary Provident Fund (VPF) to act as an optional extension of EPF.
EPF is a retirement and savings scheme similar to GPF. However, unlike GPF, EPF is mandatory for employees working in organizations with more than 20 employees.
What is Voluntary Provident Fund?
The Voluntary Provident Fund (VPF) allows salaried individuals to contribute more than the mandatory 12% of their basic salary and dearness allowance to their EPF account.
With VPF:
- Employees can voluntarily contribute 100% of their basic salary and dearness allowance.
- Contributions earn attractive interest rates similar to EPF (8.25% in FY24).
- The interest earned is tax-free, making it a lucrative, low-risk savings option.
How to start investing in VPF?
Check Eligibility:
Only salaried employees with an active EPF account can opt for VPF. Self-employed persons or those working in the informal sector are not eligible.
Notify your HR/Payroll team:
Submit a written request to your HR team specifying the amount you wish to contribute. The amount will be automatically deducted from your salary every month.
Choose your support:
Contributions can range from a small percentage to a full 100% of your base salary. Note that donations up to Rs 1.5 lakh per annum are eligible for tax deductions under Section 80C.
Monitor interest rates:
VPF interest rates are linked to EPF rates, which are updated by the government every year. Stay informed to maximize your returns.
The Central Board of Trustees of EPFO, in consultation with the Ministry of Finance, reviews this rate annually.
Why choose VPF?
Attractive Interest Rate:
VPF offers higher returns (8.25% in FY24), which are often higher than fixed deposits or regular savings accounts.
Tax Benefits:
– Contributions up to Rs.1.5 lakh are eligible for Section 80C deductions.
– Both the interest earned and the maturity amount are tax-free, provided the investment is held till retirement.
Government backed security:
Your investment is safe and unaffected by market risks, making it ideal for risk-averse individuals.
Hassle-free management:
Contributions are automatically deducted from your paycheck, ensuring a seamless and disciplined savings approach.
Flexible returns:
While VPF is focused on retirement, funds can be withdrawn for emergencies such as medical needs, children’s education, or purchasing a home. Note that early withdrawals (before five years of continuous service) may be taxed.
Key considerations
Long term commitment:
VPF is designed to save for retirement. Although partial withdrawals are allowed, using it as a long-term investment yields the best results.
Tax on excess contribution:
If the combined contribution to EPF and VPF exceeds Rs 2.5 lakh per annum, the interest earned on the excess is taxable.
No employer contribution:
Unlike EPF, VPF contributions are made only by the employee. This may marginally affect the overall growth of your retirement corpus.
Why VPF is worth it
For those looking for a high-interest, low-risk investment, VPF is a great choice. It is perfect for individuals who want to grow their retirement savings without venturing into volatile stock markets or mutual funds.
By continuously contributing to VPF, you ensure a secure financial future and enjoy the dual benefits of higher returns and tax savings.
Disclaimer: The views and investment tips of the experts in this News18.com report are their own and not those of the website or its management. Readers are advised to consult qualified experts before making any investment decision.
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