Voluntary Provident Fund (VPF) – Benefits, Procedure
Public provident fund (PPF) has always been on the list of risk averse investors. But the only limitation is that – the maximum amount you can invest in PPF is limited in a year and with average inflation rate in India being aroung 7-8%; it has become quintessential to diversify your portfolio in order to beat that inflation and invest in safest options with highest returns, so that retirement savings would not take a hit. And one such option is Voluntary Provident Fund (VPF).
VPF Benefits, Procedure
It is a type of investment option wherein a person (salaried employee) can contribute more than the normal compulsory deduction of 12% of your basic salary. This 12% is the one which employer deducts from your basic salary every month toward Employees' Provident Fund (EPF). Only salaried employees in India can open VPF account. And employers are not under obligation to contribute.
Maximum Amount Contribution to VPF
100% of Basic Salary and Dearness Allowance
Benefits of Investing In VPF
- You can contribute more than 12 % (in fact, your whole salary) in VPF. This includes basic salary plus dearness allowance. So it becomes a better solution for securing you financial future.
- Investments in VPF are made from your pre-tax income.
- Employees contribution is eligible for deduction under section 80C of the Indian Income Tax., subject to a maximum of INR 1 Lakh.
- Interest income: It is not taxable unless the interest rate exceeds the statutory rate of 9.5% at present. For the year 2012-2013, interest rate was 8.5% pa.
- Redemption: It is tax free unless withdrawn before the expiry of 5 years.
How to Invest In VPF
- In order to increase your contribution towards VPF, employee has to write to their employer asking for additonal amount of deduction from your salary.
- Normally, employee can opt for this during any point in the financial year.
- VPF form need to be filled, signed and submitted to your finance/accounts/Payroll department of your company.
- Form requires you to mention details of amount to be contributed from your Basic and DA.
Rules/Disadvantages:
- You cannot discontinue investment in the middle of the year.
- If money is withdrawn within the first five years of service, interest income become taxable. So understanding the importance of financial planning is very much essential before choosing this option.
- Most employers want their employees to invest in VPF at the start of the financial year. So it becomes an employees' responsibility to get it done through the employer.
- Interest income becomes taxable if it increases above 9.50%.
- It is only for salaried professional.
- Since rates of PF or VPF changes every year, there is a risk of the rate going down.
- Entire maturity becomes taxable if DTC i.e. direct tax code comes into effect
When are rates for VPF decided:
Rates are normally announced at the end of the year. For the financial year, 2011-12; Employees' Provident Fund Organisation announced a reduction in interest rate to 8.25% from 9.50% in 2010-11. For the year 2012-13, EPFO rates are expected to be around 8.6%. Also see VPF historic interest rates.
To Whom VPF Is Best Recommended:
- Person who is nearing the retirement should invest in it.
- If Direct Taxes Code (DTC) comes into effect next year, your entire maturity proceed may become taxable.
Important Things To Be Kept In Mind:
- Investment is for long term.
- You can contribute larger sum this year, for savings on taxes.
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