1 min read.Updated: 01 Apr 2021, 03:49 PM ISTRenu Yadav
Most experts are advising their clients to continue investing in VPF as it is currently offering an interest rate of 8.5%, which is much higher than the interest rate being offered by small savings schemes such as public provident fund
Effective 1 April, if you are contributing more than Rs2.5 lakh in your Employee’s Provident Fund (EPF), the interest earned on the same will be taxable under the newly notified rules of the Finance Act 2021. This has made some people wonder if they should continue contributing towards a voluntary provident fund (VPF) which earns the same interest as that of EPF and enjoys the same tax treatment.
“We have got various queries from our clients who are asking if they should continue with the investments or not," sad Prakash Hegde, a Bengaluru-based chartered accountant. Employees will need to inform their employers at the beginning of the financial year about the VPF contributions or any change in the same.
In Budget 2021, the government proposed to tax the interest earned on employees' contributions above ₹2.5 lakh. They have further raised the statutory limit to ₹5lakh in cases where there is no contribution by employers. This amendment will benefit government sector employees.
Most experts are advising their clients to continue investing in VPF as it is currently offering an interest rate of 8.5%, which is much higher than the interest rate being offered by small savings schemes such as public provident fund (PPF). PPF is offering an interest rate of 7.1% which was revised downwards to 6.4% for the quarter ended 30 June 2021. However, after an outcry the government decided to roll back the decision.
Even after being taxed at 30%, a person will earn interest at the rate of 5.95%, which is more than post tax returns of traditional instruments such as bank FD. Suppose a person is contributing Rs5 lakh towards EPF and VPF combined then the tax liability will be around Rs6,375 (30% of 8.5% of (5 lakh minus 2.5 lakh)) for the year for the person in the highest tax bracket. Therefore, it will make sense to continue investing in VPF for long-term debt investments.
“We are advising our clients to continue investing in VPF as even the post-tax return will be better than most other instruments," said Hegde.