How Voluntary Provident Fund (VPF) Calculated ?

Saving for the future is one of the top-most priorities for any individual out there. In India, the Voluntary Provident Fund (VPF), a government-backed savings scheme, provides an excellent opportunity for salaried individuals to build their retirement corpus.

In this blog, we’ll discuss:

• How does the Voluntary Provident Fund (VPF) add up your savings every month?
• How much interest can be earned on your contributions and 
• How exactly is the money you have contributed compounded over time? 

This way, you will be able to monitor your savings more efficiently and, most importantly, make full use of its available tax incentives.

What Exactly Is VPF?

VPF, or Voluntary Provident Fund, is considered an optional addition to the Employee Provident Fund EPF, where an employee can pay more than the required 12% of their salary. One can contribute up to 100% of their Basic Salary and Dearness Allowance in the VPF. 

Now, you may ask, 

“Who can opt for VPF?” 

Salaried individuals with a designated salary account are the only ones who can participate. While the employers may add to the sum as well, it is predominantly an employee choice. 

VPF follows a 5-year lock-in period (similar to EPF), with exceptions in case of emergencies, like medical needs or education. 

In short, To VPF contribution demands a 5–year commitment, during which contributions cannot be withdrawn unless there’s an emergency situation. 

What Are The Contributions That Are Made To EPF/VPF By Employee And Employer?

Here’s a breakdown of the contributions made by both the employee and employer to the Employees' Provident Fund (EPF) and Voluntary Provident Fund (VPF) in India.

1. Employees' Provident Fund (EPF)

It’s mandatory for both the employee and employer to contribute to EPF. 

Employee Contribution

• Rate: 12% of the employee's basic salary and dearness allowance (DA).
• Example: If the basic salary + DA is ₹50,000, the employee contributes ₹6,000 (12% of ₹50,000) monthly.

Employer Contribution

The employer’s contribution is also set at 12% of the employee's basic salary and DA. However, it is divided as follows:

• 8.33% to Pension Fund and 
• 3.67% is diverted to EPF.

2. Voluntary Provident Fund (VPF)

The Voluntary Provident Fund (VPF) is an optional extension of the EPF scheme where employees can choose to contribute over and above the mandatory 12% of their basic salary and DA. Here’s how it works:

Employee Contribution

• Rate: Up to 100% of the basic salary and DA can be contributed to VPF.
• Flexibility: The employee can decide on the percentage, and the amount is deducted directly from the salary.

Employer Contribution

• Rate: No contribution from the employer. VPF is entirely voluntary and only applies to the employee’s contribution.

How Can We Calculate The Interest Rate In VPF?

The calculation of interest in a Voluntary Provident Fund (VPF) is not in any way complex. This is how it works:

• Monthly Interest Calculation: Monthly interest is calculated on the total outstanding balance that consists of both the Employee Provident Fund (EPF) and VPF contributions made.
• Interest Credit Timing: Even though interest on VPF is calculated on a monthly basis, for record purposes, the credit is done to the EPF account at the closure of the financial year.
• Zero Interest in the First Month: Since the opening balance for the first month is zero, no interest is earned that month.
• Formula: Calculate the interest for each month. The VPF interest rate is divided by 1200 and multiplied by the opening balance.

This system of calculating interest on investment deposits will make sure that your money is working for you all the time!

What Are The Tax Benefits Of VPF?

In India, the Voluntary Provident Fund (VPF) is a great tax-saving option for salaried individuals. Any contribution made to VPF will qualify for tax deductions of up to Rs. 1.5 lakh as per Section 80C of the Income Tax Act, 1961. Interest on the amount contributed to VPF is also tax-free, but only if the annual contribution does not exceed Rs. 2.5 lacs. 

VPF comes under the EEE (Exempt Exempt Exempt) category, meaning the contributions, interest earned, and maturity proceeds are all tax-free, provided the account is maintained for a minimum period of five years. In the event of any withdrawals before five years are completed, the tax benefits shall not apply, and the withdrawal becomes taxable. Nevertheless, after the completion of five years, any interest and the principal amount shall remain completely tax free.

VPF Contribution Limits

In the case of the Voluntary Provident Fund (VPF), there is no imposed limit on contribution. Normally, one can decide to contribute up to 100% of their monthly income, which can include their basic salary and dearness allowance. Nevertheless, the employer is not obliged to contribute to the Employee’s VPF account.

One key thing to note is that, upon VPF application, one cannot close their account for at least five years. Likewise, contributions cannot be stopped during this period. Thus, this makes VPF a long-term solution, best suited for those in search of stable and tax-saving investment opportunities which also helps in tax saving.

Current VPF Interest Rates and Historical Trends in Interest Rates

Here are the current and historical VPF interest rates: 

VPF vs Other Savings Schemes

VPF, or Voluntary Provident Fund, is a brilliant saving scheme, especially for those who tend to go for investments that are tax-beneficial. This is because VPF contributions qualify for tax reliefs as stated in section 80C of the Income Tax Act, which is a great advantage for the employed. VPF, given its generous interest rates, outperforms normal saving accounts.

However,  there’s a catch — with a lock-in period for VPF, it binds one from accessing their funds within the period, and an earlier withdrawal may attract charges. 

Even so, the investor, in this case, gets to enjoy higher returns and can also invest more than the compulsory below-provision fund contributions, making VPF more appealing than other options such as the Public Provident Fund (PPF) or National Savings Certificates (NSC) for instance.

Conclusion

All things considered, understanding the fundamentals of VPF interest calculation can give you a better grasp of budgeting. By staying informed, you can maximise your VPF contributions and watch your wealth grow efficiently.

Frequently Asked Questions

Ques 1. Who can enroll in VPF?

Ans. VPF can only be availed by those who are employed and have a salary account, as the main contributions are made by the employees themselves.

Ques 2. What are the tax concessions under VPF?

Ans. Contributions made in VPF qualify for tax deductions under Income Tax Act 1961, section 80C. Any interest earned is exempt from tax only if the annual contributions do not exceed ₹2.5 lakhs.

Ques 3. What is the VPF interest rate for 2023-2024?

Ans. In the financial year 2023-24, the VPF rate of interest is 8.25% per annum.

Ques 4. Are there any penalties for early withdrawal of VPF funds?

Ans. Early withdrawals from the VPF are charged with penalties, and the tax benefits will not be applicable if the account is closed prior to 5 years.

Ques 5. What are the limits on the contributions to the VPF?

Ans. There is no upper limit fixed for the VPF contributions, and the employees can contribute up to 100% of their Basic Salary along with the Dearness Allowance.