If you have too little time to sift through various retirement options, here's a simple one. And one that saves you tax as well: you can simply volunteer to contribute more to your employee's provident fund (EPF) account if you are a salaried individual. 

Voluntary provident fund or VPF allows you to go beyond the mandated 12 per cent deduction from your basic and dearness allowance to additionally contribute up to 100 per cent of the above component every month. But remember, your employer will not be required to ‘volunteer' to contribute more than the 12-per-cent mandate.

An optimal choice

Of all the tax-saving options under Section 80C, the employee's provident fund is not only among the safest but also one of the best forms of forced savings for retirement with decent post-tax returns. And best of all, your contribution grows with your salary; its not a fixed sum but a proportion of your pay.

But most of you may not have ventured beyond the mandated amount that is deducted from your pay once your Section 80C limit is exhausted.

For instance, if your basic and dearness allowance amount to Rs 25,000 a month, your annual contribution to EPF will be Rs 36,000 a year (12 per cent of Rs 3 lakh).

Of the Rs 1 lakh exemption available, you may have claimed your insurance premium, children's education, housing loan principal and so on, thus easily exhausting your limit.

Effectively, most of the Section 80C limit would have been used up in claiming expenses you incurred rather than in investing. Even if you did save by investing in bank or company deposits, your interest on it will be taxed. And these investments are mostly ad hoc .

This is where VPF can be a highly tax-efficient and optimal investment vehicle. While investments up to Rs 1 lakh are tax-free, the entire interest income, even if investments exceed the Rs 1-lakh limit, is tax-free. It also forces you to save regularly if you think you have a large surplus. So how do you go about investing in VPF and what do you earn?

Hassle-free process

Investing in VPF is a simple process and just requires you to inform your employer to deduct a certain proportion of your pay (subject to the limit mentioned above) additionally, every month.

This amount, too, goes to your EPF pool maintained by the regional EPF office or by any private trust that your company may manage.

The interest rate that you earn will also be no different from what you get in your current EPF. For this year, the Government may pay 9.5 per cent (not yet notified) on EPF. Interest rates paid by private-run trusts may be higher.

If you are wondering whether you can invest in VPF even if you have exhausted your Rs 1 lakh limit, yes you can. And you will be able to withdraw it or avail a loan.

VPF or PPF?

That's fine, but should you invest in VPF if you are already investing in another popular scheme — public provident fund? You have quite a few reasons why you should prefer VPF over PPF or at least in addition to PPF.

For one, whether you want the tax benefit or not, you cannot invest over Rs 1 lakh in PPF. In case of VPF, you can invest well over the Section 80C ceiling.

Two, you may not be a disciplined investor in PPF. Also, you will have to take the trouble to deposit the amount in your bank or post office. In case of VPF, your employer will do this for you. Three, interest rates on PPF, in recent years, have been lower than rates notified in EPF. Also, private-trust run EPFs may even manage a far higher rate.

Four, the clause to avail a loan based on your PPF is more restrictive compared to your EPF. Five, if you want to call it a day at your office, you can withdraw the entire sum (not taxable if you have worked for over five years). PPF is locked in for 15 years and allows only partial withdrawal.

This said, the biggest limitation with VPF is that it is available only to salaried individuals. Besides, most employers do not allow you to alter your contribution mid-year. You may reduce or increase it annually.

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