Every person doing a private job contributes to the Employee Provident Fund ( EPF ). Every month this money goes into the EPF account from your salary. As per the rule, it is necessary for you to contribute 12% of your salary to the EPF account every month.
Your employer (the company in which you work) also contributes an equal amount to EPF. The employer cannot contribute more than 12% to your EPF account. But, you can increase your contribution to EPF beyond the fixed limit of 12 per cent. For this, you have to use the route of Voluntary Provident Fund ( VPF ).
Contribution in EPF alone is not enough
EPF is an important medium of savings. It helps you in retirement planning. But, EPF alone may not be enough for your post-retirement expenses. It is important for you to save more. Many people understand this much later. The sooner the employed person understands this, the better it is for him.
VPF can help you
The question is, how much additional savings do you need to make and what kind of instruments should you use for these savings? An alternative to this can be VPF. But, before starting investing in VPF, it is important for you to know about the changes in the rule in Budget 2021. It said that if your total contribution in EPF (including VPF) exceeds Rs 2.5 lakh in a year, then you will have to pay tax on the excess amount (amount above Rs 2.5 lakh). The tax rate will be according to the tax slab of the employee.
This is the complete calculation
It can be easily understood with the help of an example. Let’s say your total contribution to EPF is Rs 4 lakh. So you will have to pay tax on the 8.1% interest earned on the additional Rs 1.5 lakh (4-2.5=1.5). If you fall in the 30% tax slab, your post-tax returns will be 5.67%.
Features of VPF
Experts compare VPF with PPF. Both help in savings for the long term. But, the thing to keep in mind is that the 7.1% interest earned in PPF is tax-free. But, the condition is that you cannot invest more than Rs 1.5 lakh in it in a financial year. There is no such limit for investing in VPF.
Tax-free income will be like this
The question is should you start contributing to VPF? If your annual contribution to EPF is less than Rs 2.5 lakh, then you can start contributing to VPF. You just have to keep in mind that your total contribution in a year should not exceed Rs 2.5 lakh. If your EPF contribution is Rs 12,500 per month, it comes to Rs 1.5 lakh annually. In this case, you can contribute Rs 8,333 to VPF every month. This year will be equal to about one lakh rupees. This will take your total annual contribution to Rs 2.5 lakh. You will not have to pay any tax on the interest earned on it.
You have to decide
The above strategy can help you in retirement planning. One, your investment will be completely safe. Second, you will know approximately how much money you will get in hand after retirement. If you feel that you still need additional savings after contributing to VPF, then you can open a PPF account.
