In India, a segment of every employed individual’s income is systematically allocated to their Employees’ Provident Fund (EPF) every month. This obligatory contribution is designed to ensure financial stability for employees during their retirement. The PF account is funded through contributions from both the employee and the employer. Typically, the breakdown involves 12 per cent of the employee’s basic salary and an equivalent 12 per cent from the employer, although there may be variations based on specific sectors or employee preferences.
The amassed PF fund accrues interest over time, and individuals can tap into it under specific circumstances such as retirement, job transitions, or medical emergencies. Serving as a valuable financial tool for long-term savings, the EPF plays a pivotal role in the retirement planning of numerous salaried individuals in India. Nevertheless, it is feasible to increase this PF sum fourfold with minimal effort.
Numerous corporations are acknowledging the significance of empowering employees to manage their long-term financial health. They provide tools that enable employees to modify their PF contributions. These tools may permit employees to select a new PF contribution percentage within a designated range, starting from the obligatory minimum (usually 12 per cent) to a predetermined company-defined maximum (which could be 100 per cent of the basic salary or a fixed higher limit). Some tools may even present preset options for common contribution increments, such as 5 per cent or 10 per cent.
While this might lead to a slight reduction in take-home pay, augmenting PF contributions can facilitate higher savings while concurrently lowering income taxes. Additionally, after each assessment cycle, your net income will rise, alleviating this concern.
Opting to invest in a VPF
Though the whole process may sound cumbersome, shifting your money to a Voluntary Provident Fund (VPF) account can help you earn more interest in the long run.
For those unfamiliar, the VPF is an extension of the EPF scheme in India. Unlike mandatory EPF contributions for both employers and employees, VPF contributions are entirely optional. This implies that employees have the flexibility to contribute additional amounts beyond the 12 per cent mandated by EPF.
In essence, VPF serves as a voluntary savings scheme for Indian salaried individuals, enabling employees to contribute additional funds to their PF accounts beyond the obligatory EPF contribution. Employees have the flexibility to decide the amount they wish to contribute, with the option to contribute up to 100 per cent of their basic salary and dearness allowance.
The VPF contributions are subject to a five-year lock-in period from the date of contribution, akin to EPF. Nevertheless, exceptions exist for particular circumstances such as retirement, medical emergencies, or housing needs. It’s important to note that, unlike EPF, employers are not required to make contributions to their employees’ VPF accounts.
Benefiting from VPF investments
Venturing into VPF presents an appealing blend of attractive returns, tax advantages, and enduring financial security. Exploring the VPF reveals a wealth of financial advantages, making it a prudent and gratifying option for individuals with a salary. Here is a breakdown of the principal benefits:
- Elevated returns: Presently, VPF offers a notable annual interest rate of 8.10 per cent, surpassing the rates provided by many conventional savings tools such as bank deposits. This results in substantial growth in your retirement savings over the long term.
- Tax advantages: Contributions to VPF are eligible for tax deductions under Section 80C of the Income Tax Act. This allows you to decrease your taxable income by up to ₹1.5 lakhs per year, consequently reducing your overall tax liability.
- Tax-exempt maturity: Once the five-year lock-in period is fulfilled, the maturity proceeds from your VPF account are entirely free from taxation. This enables you to reap the full benefits of your investment without incurring any additional tax obligations.
- Promote steadfast savings habit: The VPF encourages a committed savings routine with a lock-in period of five years. This enables you to build a substantial fund for upcoming milestones such as retirement, children’s education, or a home down payment.
- Backed by Government assurance: The VPF is overseen by the Employees’ Provident Fund Organisation (EPFO), a government-supported entity, guaranteeing the safety and security of your investments.
- Flexible liquidity choices: While VPF imposes a lock-in period, partial withdrawals are allowed in certain situations, such as medical emergencies, educational expenses, or home loan repayments. This offers a measure of flexibility in case of need.
- Strategic retirement savings: VPF aids in constructing a significant retirement fund through its tax-free growth and appealing interest rate. This ensures financial security and independence during the retirement phase.
- Enhances credit rating: Consistent VPF contributions have a positive impact on your credit score, potentially enhancing your eligibility for loans and other financial products in the future.
- Simplified investment procedure: Getting involved in VPF is uncomplicated. Just approach your employer’s HR department and express your desire to enroll in VPF contributions. The designated amount will be deducted directly from your salary, making it a convenient and hassle-free savings choice.
How to invest in a VPF?
Embarking on the journey of investing in a VPF is a simple process that opens the door to a wealth of financial benefits. Follow this step-by-step guide to initiate this secure and rewarding endeavour:
- Check your eligibility: Make sure you are already enrolled in the EPF scheme through your employer. The VPF functions as an extension to your existing EPF account.
- Reach out to your employer’s HR department: Communicate your desire to establish a VPF account and make additional contributions beyond the compulsory 12 per cent contribution.
- Complete the VPF application form: Input information such as your preferred monthly contribution amount and any specific instructions if applicable.
- Submit the form and documentation: Deliver the filled-out form along with any necessary documents (usually a signed copy of your PAN card) to your HR department.
- Approval and salary deduction: Upon receiving your request, your employer will proceed to approve it and commence VPF deductions from your salary based on the chosen amount.
Engaging in VPF transcends numerical considerations; it’s about asserting command over your financial health and charting a course towards a more promising future. The compounding power of interest, combined with tax-free advantages has the potential to yield significant results over time, converting your modest contributions into a substantial nest egg for purposes like retirement, education, or any other enduring objective you may have.
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Published: 30 Jan 2024, 11:02 AM IST