Use VPF and PPF to balance the reduction in EPF contribution
- Lower contribution for a three-month period may appear negligible. But the reduction in provident fund (PF) contribution can impact many other financial aspects.
- Employers give a small window for employees to opt for VPF. Typically, it is at the beginning of the financial year.
The government on 13 May reduced the employee’s and employer’s contribution to the employee provident fund (EPF) for three months. Both the parties will contribute 10% each of the basic salary for the period instead of the mandated 12% each. This has been done to increase cash in the hands of the employees.
Lower contribution for a three-month period may appear negligible. But the reduction in provident fund (PF) contribution can impact many other financial aspects. Those who have stable income at present should opt for a voluntary provident fund (VPF) or public provident fund (PPF) to ensure they maintain the regular contribution of 24% (the total of employee and employer contribution) of the basic salary, according to financial planners.
For example, if an individual earns a basic salary of ₹30,000, for the three-month period, the employee’s and employer’s contribution at 10% each will be ₹18,000. In the usual course, it would have been ₹21,600. The difference, therefore, is ₹3,600. “But this money compounds over decades. After 20-25 years it would be significant,” said Basavaraj Tonagatti, a Sebi-registered financial adviser.
This lower contribution to EPF impacts employees in two ways. “First, the EPF contribution is eligible for a tax break under Section 80C. If the EPF contribution is reduced, the corresponding tax break also reduces. Second, this cut would mean lowering of the EPF corpus or retirement savings,” said Adhil Shetty, CEO, BankBazaar, a marketplace for financial products. Lower EPF outgo means a salaried would need to look at other avenues under Section 80C to get the tax deduction.
HOW VPF WORKS
Employers give a small window for employees to opt for VPF. Typically, it is at the beginning of the financial year. If an employee doesn’t opt for it, he may not be able to contribute toward VPF for the remaining year. A salaried, hence, need to check with the human resource (HR) department whether the window to contribute towards VPF is still open. In case the window has closed, Tonagatti suggest that employees can look at investing in PPF.
The interest rate of VPF is the same as the EPF, which the government usually announces towards the end of the financial year. An employee has the option to invest up to 100% of the basic salary in VPS. It also has the same tax benefits as EPF, that is, there is tax deduction on investment, no tax on accrual or withdrawal.
When you change jobs, you can also move your VPF funds to the new employer just like you move the EPF account.
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First Published:15 May 2020, 01:31 PM IST
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