When you talk about tax saving, normally people talk about ELSS mutual funds, tax saving deposits, PPF, EPF, etc. But these are well known, and most people are conversant about these instruments. However, there is a secret instrument that nobody discusses or talks about. This is the voluntary provident fund (VPF) which is available to salaried taxpayers who are one of the most tax-abused sections of our society.

Till last year, the VPF could be used without limits but now the government of India in all its wisdom has put a limit of INR 2.5 lakhs of contribution to be made tax-free from both EPF and VPF so the gains are limited but still, there are people who don’t contribute INR 2.5 lakhs to EPF alone. They can bridge the gap with VPF and enjoy an exemption on the corpus plus the interest.   For government employees or those employees whose employer does not contribute to the EPF account, the limit is Rs 5 lakh instead of Rs 2.5 lakhs.

Also, read about the Best Ways to save Tax on Investment Income in India

VPF (Voluntary Provident Fund) As the name suggests, VPF allows the contributor to make additional voluntary payments to his EPF over and above what is mandated by the law and your salary structure. For example, let us suppose you contribute INR 5,000 and your employer contributes 5,000 each for a total of INR 10,000 each month. Through VPF you can contribute an additional INR 10,000 or even INR 20,000.

The maximum contribution is up to 100% of his Basic Salary and Dearness Allowance. Interest is earned at the same rate as the EPF and is credited to their EPF account.

Advantages of VPF

1. It has an almost sovereign guarantee because I don’t expect the government will allow the EPFO to ever default given that crores of salaried taxpayers have saved a large chunk of their life savings in this fund.
2. The interest rate is much higher than normal debt funds or fixed deposits. It is currently 8.1% which is quite high and the same as that of the EPF.
3. The biggest advantage is the tax savings. There is no tax that will be levied on the VPF contributions in the form of the corpus that is formed or the future interest. For example, let’s say that you contributed INR 1 lakhs in VPF in 2023. The Rs.8,100 in interest that you will get from the VPF next year will be tax-free and the subsequent interest incomes will also be tax-free till you have an EPF account. This really increases your returns exponentially over a period of 20-30 years over a normal debt asset.
4. VPF is voluntary which means that you can change the amount that you contribute every month from 0 to 100% of your basic salary. That gives you a lot of flexibility compared to the EPF which is 12% of your salary.
5. Almost all the benefits of EPF are applicable to VPF as your voluntary contribution gets clubbed with the EPF corpus and it gets similar treatment.
6. The redemption is also tax-free until and unless the same is not withdrawn prior to the maturity period of 5 years.
7. Simple and hassle-free operation is another striking feature. Every employee needs to get in touch with their Finance or HR team to get the VPF account under their name. The only requirement in terms of paperwork is the Voluntary Provident Fund Account Registration form. After which their EPF account gets transferred to the VPF account. Moreover, the account can be applied at any time within the running financial year.
8. In case of job change, VPF accounts are easily transferable from one employer to the new employer and thus the benefits of already done investment in VPF contributions remain intact.
9. VPF contribution can also give you the 80C tax benefit till the INR 1.5 lakh limit.

So now after talking about the huge benefits, let’s see what the disadvantages are if any.

The disadvantage is that this money is not liquid as withdrawing money from the EPF account has some hassles. Also generally you would like the money to grow and compound ideally till you retire so would not advise taking anything out unless it is an emergency. You have to make an application to the EPFO office and give reasons like building a house, marriage of a daughter, medical expenses, repaying a home loan, etc. It is not like a share or an FD where you can easily sell with the click of a mouse. During COVID, many people used this facility as they needed liquidity due to job loss or reduced earnings.

Another disadvantage is that only salaried income taxpayers with a valid EPF account can have a VPF, and self-employed people cannot get this benefit. The PPF is the only alternative, but it gives a much lower interest rate.