Voluntary Contribution to EPF - A good tax saving tool

It is a common knowledge that a salaried employee has to contribute 12% of his basic salary towards EPF. But do you know that you can opt to contribute more than the mandatory 12% ? I did not know this until recently and when I researched about it, I found it to be a good tax saving tool for risk-averse-me. Lets discuss the details.

Voluntary Provident Fund (VPF), as it is called, is the voluntary contribution of the employee to EPF beyond the mandatory 12%. The maximum amount an employee can contribute is 100% of his basic. This extra contribution from the employee gets deposited in his existing EPF account and hence earns the same interest as normal EPF contribution.

Benefits of VPF

  1. Risk free investment with attractive interest rates. In recent years, EPF rates have usually been around 1% higher than PPF. See EPF rates for different years - https://www.humlog.net/finance/epf-interest-rate-year-to-year

  2. Tax exemption benefit under Section 80C. (Contribution of upto Rs 1 Lakh is tax free)

  3. The maximum amount you can deposit is 100% of your basic while in PPF it is capped at 1 Lac annually.

  4. The entire interest income, even if investments exceed the Rs 1 lakh limit, is tax-free (if your EPF account is running for over five years including transfers from different companies).

This is a good option for risk averse investors who have a large surplus of money and are giving full tax on their FD interests.

I really wonder why VPF is not popular even when it offers so many benefits. I think the reason is the perception of non-transparency of EPF account. As it is managed by government, the difficulty people feel is in withdrawal of amount and in knowing the total balance they have accumulated so far. But with the computerization of EPF records and the availability of online tracking of account, this unease should also go. See my previous posts on EPF withdrawal process and Track EPF account online with E-Passbook

How to start VPF

Companies typically ask their employees to submit the VPF mandate at the beginning of the financial year. Contact the Finance/Payroll department of your company and ask if you can start contributing to the VPF from this month onwards. You just have to fill up a form with them. To change your contributions or to discontinue the VPF option, you will have to go by your company's policy on VPF. In my case, I was allowed to start VPF at the start of any month and was allowed to change contribution or discontinue after 2 months.

Note : Your employer will not be required to ‘volunteer' to contribute more than the 12-per-cent mandate.

To read all articles related to EPF/PF go to EPF/PF - All Articles

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