Kolkata: As the nomenclature indicates, VPF, or voluntary provident fund, is an optional savings scheme for salaried individuals (employed in the formal sector of the economy) that is similar to and an extension of Employees Provident Fund (EPF), which covers all formal sector employees in this country. A big difference between the two is that while EPF is mandatory, VPF is optional. But both provide the same level of security of capital.

Voluntary Provident Fund allows an employee the facility to contribute more funds to their EPF account over and above the mandatory requirement. While EPF deducts 12% of the basic salary + DA from an employee’s pay as well as a matching amount from the employer in the EPF account and PES (pension) account of an employee, VPF allows the employee to go beyond this amount and invest additional funds into the EPF account.

Is VPF a good investment

The answer to this question depends on the outlook and perspective of the employee concerned. If an employee is exploring ways of a significant rate of interest and complete safety of capital to build a post-retirement corpus, a combination of EPF and VPF is almost an ideal combination. The rate of interest in VPF is the same as that in EOF. It is reviewed and announced every year by the EPFO (Employees Provident Fund Organisation). For FY24, it was set at 8.25% and is always on the higher side.

Consider the other benefits of VPF. Tax efficiency is very high since it falls under the EEE category indicating income tax exemptions on contribution, interest as well as maturity amount. This feature makes it a clear choice for those trying to extract maximum tax saving benefits from safe investments. VPF is very easy to apply and a simple application routed through the employer creates a VPF account. The existing EPF account of the employee serves as the anchor for the VPF account. Another significant feature of VPF is flexibility. It allows employees to get their accounts transferred between employers smoothly. Therefore, change of jobs, which is common these days, does not create hassles. However, if the account earns interest in excess of Rs 2.5 lakh a year, it becomes taxable.

What is VPF and how it works

One of the biggest advantage of VPF is that an employee can invest any amount it wants from his/her basic salary + DA in it — even 100%. Once an employee begins VPF contributions, it has to be continued for a minimum period of 5 years. During this period the contributions cannot be , initiated, the VPF account remains active for a mandatory period of five years, during which contributions cannot be discontinued.