The EPF or Employee’s Provident Fund is a portion of your salary that is deducted by the employer for your retirement saving. This money is deposited with Employee Provident Fund Organisation (EPFO) and it earns an interest income which is set by the government once a year.
Organisations with 20 or more employees have to mandatorily enroll all employees earning less than Rs 15,000 per month into the EPF. Most companies also enroll employees earning more than the minimum amount into the EPF as it’s a tax efficient way to earn interest income. The EPF contribution (both yours and your employer’s) counts towards the annual deduction under Section 80C. The EPF interest is completely tax-free.
In the ‘standard’ EPF system, the Employer cuts 12% of your salary and matches it with 12% from its own pocket. Thus 24% of your salary (basic salary + dearness allowance) is set aside in your PF account for retirement.
What is Voluntary Provident Fund?
Besides the PF, you can also make an additional contribution to the provident fund which is called Voluntary Provident Fund (VPF). In the VPF, you can contribute up to 100% of salary (basic plus dearness allowance) to the VPF, unlike EPF which is 12% of the basic pay from your side and 12% from the employer.
The VPF contribution up to Rs 1.5 lakh per annum is eligible for tax deduction under Section 80C (provided you haven’t used it up with other investments that enjoy section 80C). But the beauty of VPF is that the interest (which is same as standard EPF, currently set at 8.55%) is tax-free. In other words, the VPF is a good way to earn tax-free returns on your savings.
Note that if you withdraw your EPF or VPF corpus within five years of commencing employment, the maturity corpus becomes taxable income. You must hence, keep contributing for at least five years. Also note that the VPF contribution cannot exceed 100% of basic salary + dearness allowance. It will thus exclude HRA (House Rent Allowance), Medical Reimbursement, Transport Allowance etc.
You can enroll into the VPF at any point during the financial year. You have to make VPF contributions through your organisation’s HR department which will make the appropriate deductions from your salary.
The interest on the PF (including VPF) account is declared every year by the EPFO (Employees Provident Fund Organization). This rate was 8.55% for FY18 and 8.65% in FY17, much higher than the rates on bank FDs (which are taxable). The rate is based on how the EPF investments perform.
Yes, the NPS or National Pension System also has no upper limit on contributions. The NPS is a low-cost, tech-friendly flexible retirement system. Unlike EPF which is only open to employees, NPS is open to self employed individuals as well as employees. The returns on the NPS corpus are also tax free while held in the NPS account. The NPS does not have a ‘declared interest rate’ every year. Your returns are determined by the returns on the three NPS assets – equities, corporate bonds and government bonds. The NPS allows investment up to 50% in equities under the Active Choice Model, allowing you to potentially earn a higher return than the VPF. You can read more about it here.
The only disadvantage of the NPS in relation to the EPF is that only 40% of the NPS maturity corpus is tax free while the 100% of the EPF maturity corpus is tax free. You can also withdraw your own (employee contributions) and the returns on them in the EPF if you have been unemployed for more than 60 days. This option is not available under NPS.
If you are already enrolled under the EPF, consider increasing your VPF contributions if you can wait for more than five years (and ideally till retirement). It can beat many other taxable alternatives for retirement saving such as bank FDs and even mutual funds.