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Voluntary Provident Fund Tax Benefits and Beyond

Financial planning is essential, especially for salaried individuals looking to maximize savings and secure a comfortable future. Among the various options available, the Voluntary Provident Fund (VPF) is a standout due to its combination of guaranteed returns and tax efficiency. 

With its risk-free nature and attractive interest rates, the VPF not only ensures financial stability but also offers significant tax savings under Section 80C of the Income Tax Act. This blog will explore the voluntary provident fund tax benefit, delve into its features, and highlight why it’s an excellent option for long-term financial growth and peace of mind.

What is the Voluntary Provident Fund (VPF)?

The Voluntary Provident Fund (VPF) is an extension of the Employee Provident Fund (EPF) scheme. While EPF mandates a 12% contribution from your basic salary and dearness allowance, VPF allows you to voluntarily contribute up to 100% of your salary.

Key Features of VPF

  • Contributions are optional and linked directly to your EPF account.
  • Interest rates are the same as EPF, currently around 8.15% per annum (subject to government announcements).
  • The lock-in period aligns with EPF, making withdrawals simple and integrated.

VPF is a favourite for risk-averse investors because it offers a high degree of security and reliability.

Voluntary Provident Fund Tax Benefit

The voluntary provident fund tax benefit is one of the key reasons professionals opt for this scheme. Let’s examine how this works in detail:

Tax Deduction on Contributions

Under Section 80C of the Income Tax Act, contributions to VPF are eligible for tax deductions up to ₹1.5 lakh annually. This means you can reduce your taxable income significantly while boosting your savings.

Tax-Free Interest

The interest earned on VPF contributions is entirely tax-free, provided your total contribution to EPF and VPF does not exceed ₹2.5 lakh for private employees or ₹5 lakh for government employees annually.

Tax-Free Withdrawals

Both the principal and accumulated interest are tax-free upon withdrawal, provided the VPF account has been maintained for at least five years.

These benefits make the VPF tax saving an attractive option for individuals aiming to reduce their annual tax liability while ensuring wealth accumulation.

VPF vs Other Tax-Saving Investments

When it comes to tax-saving options, VPF stands out for its simplicity, reliability, and high returns. Let’s compare it to other popular schemes:

FeatureVPFPPFELSSFD (Tax-Saving)
Interest Rate~8.15%~7.1%Market-Linked~6-7%
Tax DeductionSection 80CSection 80CSection 80CSection 80C
Tax on ReturnsTax-FreeTax-FreeTaxableTaxable
RiskLowLowModerate to HighLow
Lock-in PeriodLinked to EPF15 Years3 Years5 Years

While Public Provident Fund (PPF) and Equity Linked Saving Schemes (ELSS) offer tax savings, VPF’s combination of high returns and tax efficiency makes it a preferred choice for salaried employees.

Eligibility and Process to Avail VPF Tax Benefits

Eligibility

  • Any salaried individual registered under the EPF scheme is eligible to opt for VPF.
  • Self-employed individuals cannot participate in the VPF scheme, but they can explore alternatives like PPF for tax-saving purposes.

How to Contribute

  • Inform your employer about your decision to contribute to VPF.
  • Specify the percentage of your basic salary you wish to contribute.
  • Your employer will ensure the contributions are deducted directly from your salary and deposited into your EPF account.

With its straightforward process, availing the vpf tax benefit is both simple and hassle-free.

Why Choose VPF for Tax Saving?

The voluntary provident fund tax benefit is just one of many reasons to consider VPF. Here’s why it’s a preferred choice:

High Returns

VPF offers one of the highest guaranteed returns among fixed-income instruments, outpacing fixed deposits and recurring deposits.

Zero Risk

Backed by the government, VPF provides unparalleled security and stability.

Integrated Savings

Contributions to VPF are seamlessly linked to your EPF account, ensuring ease of management.

Long-Term Wealth Creation

With compound interest and tax-free returns, VPF helps build a substantial retirement corpus.

Financial Discipline

Automated salary deductions ensure consistent savings, even if you’re not actively managing your investments.

Conclusion

The voluntary provident fund tax benefit offers a unique combination of high returns, tax efficiency, and long-term wealth creation, making it an indispensable tool in any salaried individual’s financial plan. By opting for VPF, you not only reduce your tax burden through VPF tax saving but also ensure a secure and prosperous future.

While VPF may not be ideal for short-term goals, its reliability and consistent returns make it a go-to option for building a retirement corpus. If you’re a salaried professional in India, now is the perfect time to maximise your savings and embrace the opportunities offered by the VPF.

FAQs About Voluntary Tax Benefits

  • Can I withdraw from my VPF before retirement?

    Yes, partial withdrawals are allowed under specific circumstances such as medical emergencies, home purchases, or children’s education. However, withdrawals before five years of account maturity may incur tax liabilities.

  • Is the VPF interest rate fixed?

    No, the EPFO reviews and revises the interest rate annually.

  • What happens if I switch jobs?

    Your VPF account remains active and can be transferred to your new employer, ensuring continuity of benefits.

  • Are there any risks involved in VPF?

    VPF is one of the safest investment options as it is backed by the Indian government. However, it is not ideal for those seeking short-term liquidity.

  • Can I reduce my VPF contributions mid-year?

    Once you commit to a VPF contribution percentage, it remains fixed for the financial year. You can revise it during the next financial year.

Contents

Frequently Asked Questions (FAQs):

Finnable has set a required minimum age for personal loan of 21 years for individuals to be eligible for a personal loan. This ensures that applicants have reached legal adulthood and are capable of entering into a financial agreement.

Yes, Finnable understands the financial needs of young borrowers and offers personalised loan options tailored to their specific requirements. Whether it's financing higher education, purchasing essential items, or starting a business venture, Finnable provides support to young individuals seeking financial assistance.

Borrowers nearing retirement may have unique financial needs, such as retirement planning, medical expenses, or supporting their children's education. Finnable offers personalised loan solutions that consider the specific circumstances of pre-retirement individuals, helping them meet their financial goals.

Unfortunately, no. Finnable does not, at the moment, offer any loans to senior citizens. Currently, 60 is the maximum age for personal loans set by Finnable

Other than personal loan age limits, Finnable considers various other factors for determining loan eligibility. These factors may include the applicant's income, credit score, repayment capacity, and employment stability. By assessing these aspects comprehensively, Finnable ensures that borrowers across different age groups can access the loan products that best suit their financial needs. 

 

Amit Arora

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.
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