Put more into voluntary PF, get 9.5%

The new United Progressive Alliance government, in its Common Minimum Programme, has proposed a 2 per cent cess on taxable income.

What does that mean to the salaried class? Considering that the government seems to be for maintaining interest rates "" so as to not displease the small saver "" salaried employees might well take advantage and invest the maximum they can in their company's voluntary provident fund (PF) scheme.

Today, it is mandatory for all employees to contribute 12 per cent of their basic pay to provident fund. A matching contribution is made by the employer, and on this combined amount, employees get an assured annual return of 9.5 per cent.

But did you know that as an employee, you can put in more than the mandatory 12 per cent of basic pay?

"Employees are increasing their contribution to voluntary provident funds," says Amit Gopal, senior vice-president of India Life.

Employees can actually put their entire pay package into the voluntary PF, and earn the highest interest in the market today at 9.5 per cent.

So how does this work? Employees have to instruct their payroll department to deduct voluntary PF from salary at a pre-decided rate.

Thus, an employee can instruct to deduct an additional 10 per cent from his salary and add it to the provident fund. This would be over and above the 12 per cent mandatory contribution. The employee would thus earn 9.5 per cent on the entire amount though the employer would not match the additional 10 per cent contribution.

"Most companies prefer deduction as a percentage of basic salary, but they do not limit the extent to which an employee can contribute to the voluntary PF," says Gopal.

What's more, contribution can be made at any time during a year. So say, in May/June, parents have to keep funds aside for payment of school and term fees, they might choose not to have a huge deduction from their salary packages in that particular month.

However, many trusts "" companies set up an internal trust for managing the funds "" do not permit stoppage of contribution once it has commenced till the end of the financial year for administrative purposes. So one would has to check this out at the organisation level.

"For salaried employees who can avail the Section 88 benefit, the return on voluntary PF can be as high as around 24 per cent," says Gopal.

The amount accumulated is not taxed at the time of settlement "" that is when one resigns or retires from a company. The entire money plus the interest paid on it is therefore tax free for a retiring employee.

That the avenue is the most lucrative and safest investment option can be gauged from the fact that many former employees do not withdraw their funds from the PF trusts even after leaving their jobs or even the country.

About 15 per cent of funds lying with some PF trusts of multinational companies actually belong to former employees. After all, on withdrawing the funds, there is no other instrument in the market today that guarantees individuals earn as much, with no premium attached to the safety aspect of the funds.

So what if you are one of those employees who chooses to stick on to a firm till retirement age? Well, PF is an illiquid investment and should be viewed more as a retirement saving, say trustees.

Withdrawal is a function of the rules of the respective trust. As is the case with mandatory PF, the VPF can be accessed only under certain conditions. That is, an employee gets the full sum "" both the mandatory and voluntary portion "" on retirement.

Alternatively, employees can choose to take a loan against the amount accumulated in the fund. Availing of a loan is dependent on permissible rules and circumstances.

Employees are allowed to access money for reasons such as housing, marriage, children's education among others. Conditions also apply with regards to their eligibility, and are usually based on the number of years of being a member of the PF.

At the same time, with trusts finding it difficult to meet the statutory 9.5 per cent annual return, there has been more leniency. Trustees are easily permitting loans against the funds accumulated by employee. So much so, employees can even choose not to repay the 'so-called loans'.

WHY VOLUNTARY PF? Companies are not permitted to pay differential rates of interest on voluntary PF, thereby making it "" at the current 9.5 per cent rate "" a very attractive proposition. What's more, the contribution qualifies for a tax rebate under Section 88 of the Income Tax Act. This means, the return is all the more attractive. Of course it is subject to the various slabs that are applicable under the Act.