Invest in VPF if you don’t want to dent your retirement kitty due to lower EPF

To provide relief to employees and employers facing cash crunch, the government has reduced their mandatory contribution to the Employees’ Provident Fund (EPF) from 12% to 10% of the basic pay plus dearness allowance, for three months. But what if you are not facing a cash crunch and don’t want to reduce your contribution?

While you can’t do anything about the employer’s contribution, you can invest your 2% share in other instruments that give similar returns. According to financial planners, people who have stable income at present and are looking to maintain their contribution of 12% of the basic salary plus dearness allowance can contribute the additional amount of 2% in Voluntary Provident Fund (VPF) or Public Provident Fund (PPF).

Note that the total 6% shortfall in your EPF contribution over three months can leave a huge dent in your overall retirement corpus.

This lower contribution impacts employees in two ways. “First, the EPF contribution is eligible for a tax break under Section 80C. If it’s reduced, the tax break also reduces. Second, would mean lowering of the EPF corpus or retirement savings,” said Adhil Shetty, CEO, BankBazaar, an online marketplace for financial products.

what isVPF?

Under VPF, you can increase your share of EPF contribution, but the employer won’t exceed the 12% threshold, which has been reduced to 10% for three months. The additional amount you contribute, beyond the threshold set by the Employees’ Provident Fund Organisation (EPFO), goes into VPF. You have the option to invest up to 100% of your basic salary plus dearness allowance in VPF.

The interest rate on VPF is the same as EPF, which the government usually announces towards the end of a financial year. VPF also gives the same tax benefits as EPF. It falls under the exempt-exempt-exempt (EEE) tax structure—you get tax deduction benefit at the time of investment, there’s no tax payable on accrual or withdrawal.

When you change jobs, you can also move your VPF funds just like you move EPF. Both are linked to the Universal Account Number (UAN). The withdrawal rules also the same.

what you should do

Employers, typically, give a window to employees to opt for VPF at the beginning of a financial year. “Employees can opt anytime in the year. The Provident Fund Act does not have any conditions or restrictive clauses for an employee opting for EPF. Employers usually seek such investment details in March for administrative control. It helps companies to make the changes right at the beginning of the year,” said Anil Lobo, an independent HR consultant. Check with your HR department whether the VPF window is still open.

But what if the window has closed? In that case, Basavaraj Tonagatti, a Sebi-registered financial adviser, suggests you can look at PPF, which also enjoys EEE tax status and gives guaranteed returns, as per the rates announced every quarter. If you already exhaust your PPF, the next option is to increase your contribution to the debt portion of your retirement kitty.