If you are in your 20s or 30s and try to use some of the “calculate how much you need on retirement” tools available online, the result is an unbelievably large sum; with the effect of inflation and time factored in. And any financial planner would tell you that the only way to save this kind of money would be to save wisely and regularly, take calculated risks and invest in a proportion of equity and debt according to your age, profile, line of business etc.
The voluntary provident fund or VPF is one of the best options which should form the fixed income / low risk category of your retirement planning portfolio.
What is VPF?
VPF or the Voluntary Provident Fund is the voluntary deduction of a specified sum from your salary towards EPF, over and above the 12 % of basic cum dearness allowance deducted from your salary by the employer. However, while the employer also contributes an equal sum in case of EPF, there is no such contribution in a VPF.
Features and benefits
- The interest earned on the VPF (fixed at 8.6 % pa for FY 2013-2014) is tax free.
- The VPF contribution is also eligible for tax rebate under section 80 C.
- There is no upper limit unlike the Public Provident Fund or PPF which accepts contributions of only upto Rs 1 Lakh per annum. The entire basic pay can be contributed to the VPF.
- The contribution goes into the EPF pool and the maturity proceeds are tax free(unless withdrawn within 5 years).
- The entire corpus can be withdrawn when one quits the organization, or for special requirements like building a house, marriage, childrens’ education etc.
- VPF amount can also be changed, at the start of each financial year. It can be discontinued for a specified period in times of extra expenditure/outflow.
- Since VPF is deducted every month from your salary, it is a disciplined way of saving.
- The interest rate on the VPF is subject to change and if lowered, the new rate would be applicable on the entire saved corpus.
- This facility is available only for the salaried class.
The VPF is one of the very few low risk high safety avenues where the investment, interest and the maturity all are tax exempt (EEE), and the advantages far outweigh the limitations.
If you are salaried and have a monthly income surplus which you can save for the long term, do consider opting for the Voluntary Provident Fund.