BUILDING WEALTH WITH EPF / VPF : LET COMPOUND INTEREST WORK FOR YOU

EPF (Employees' Provident Fund) and VPF (Voluntary Provident Fund) are retirement savings schemes designed for salaried individuals. The key aim of these products is to help employees accumulate funds for their retirement.  

Here’s a detailed breakdown of each:

1. Employees' Provident Fund (EPF)

Definition:

EPF is a government-mandated savings scheme in which the employee and the employer contribute a certain percentage of the employee’s salary toward the fund. The amount gets accumulated over the years, including the interest earned. This is a compound interest Scheme.

Key Features:

• Mandatory for salaried employees in organizations with more than 20 employees.
• It is managed by the Employees' Provident Fund Organization (EPFO).
• Employee Contribution: 12% of your basic salary + dearness allowance (DA).
• Employer Contribution: Also 12% of your basic salary and DA. However, a portion of this (8.33%) goes into the Employees' Pension Scheme (EPS), and the remaining (3.67%) goes into the EPF.

Interest Rate:

• The interest rate on EPF is decided by the government annually. It  is 8.25 % today
• Tax-Free Interest: The interest earned on your EPF balance is tax-free, provided you maintain the account for at least 5 years.

Tax Benefits:

• Contributions to the EPF are eligible for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per year.
• The amount withdrawn after 5 years of continuous contributions is tax-free.

Withdrawals:

• You can withdraw the accumulated EPF amount when you retire or if you leave the company.
• Partial withdrawals are allowed for specific purposes, such as:
• Medical treatment
• Buying a home
• Education expenses

2. Voluntary Provident Fund (VPF)

Definition:

VPF is an extension of the EPF scheme, where an employee can contribute an amount greater than the mandatory 12% EPF contribution. The contributions are voluntary and are eligible for the same benefits as the EPF.

Key Features:

• Voluntary: Unlike the EPF, which mandates a contribution of 12%, a VPF allows employees to contribute more than 12% of their basic salary.
• The entire contribution is deposited into the EPF account, meaning there is no separate VPF account.
• The interest rate on VPF contributions is the same as the EPF rate

• Employee Contribution: You can contribute more than the mandatory 12% of your basic salary. There is no upper limit for VPF contributions, but the total employee contribution (EPF + VPF) should be monitored to stay within limits if you're concerned about taxes on interest. If employee contribution (employee contribution on EPF + VPF) is greater than 2.5 lakhs, the interest on excess amount is taxable based on individuals tax slab.
• for example:  employee contribution on EPF + VPF is 3 lakhs on year one but on year two it is less than 2.5 lakhs. the interest on 50 thousand excess in year one will be taxed every year.  
• Employer Contribution: The employer continues to contribute only the mandatory 12% (split between EPF and EPS). The employer does not contribute to VPF.

The tax benefits and withdrawal are similar to EPF. In some organization the EPF and VPF is maintained by Employer's trust. in those cases interest will be credited on 31st march that is end of financial year. if EPF and VPF handled by EPFO, the interest will be credited at the month of October or November.  the interest is calculated monthly and credited annually.

let us see the case to achieve 1 crore,  the total contribution is 20,000 per month on EPF/VPF (employer contribution toward EPS is excluded) and the interest rate is 8.25%. 

Conclusion:

To reap Benefits without tax, ensure that your employee contribution (EPF + VPF) remains below ₹2.5 lakh in a financial year. For the interest to be tax-free, your EPF/VPF account must be maintained for at least 5 years.