Good time to opt for voluntary provident fund to enhance returns

Liquidity is an issue, but it scores on other parameters

The stock market is going nowhere, debt mutual funds (MFs) are facing redemption pressure due to asset quality risk, and bank fixed deposit (FD) rates are coming down — this, in short, is the tale of an ordinary investor’s portfolio. 

In such times, the employees’ provident fund (EPF) is one of the few avenues that can come to your rescue. With the financial year just starting, you could take this route to enhance your portfolio’s returns. 

As an employee, you contribute a minimum of 12 per cent of your basic pay towards EPF. Over and above this, you can invest up to 100 per cent of your basic salary (plus dearness allowance, if any) towards provident fund. This additional portion, over the 12 per cent, goes into the voluntary provident fund (VPF). 

Says Anuj Shah, chief financial planner of Wealth360: “This is an excellent debt-investment opportunity. It’s a good idea to invest in VPF, especially now. You cannot compare VPF with equity. Still, if you compare it with other debt products, this can be a very good option, especially in these tough times.” However, unlike the EPF option, there is no contribution from your company on the VPF portion.

Sriram Iyer, chief executive officer-digital wealth management, Anand Rathi Wealth Management, says: “The three-four essential elements you look at while investing are interest rate risk, credit risk, tax efficiency, and liquidity. VPF performs well on all three. With a near-zero credit risk, thanks to the government’s backing, it is considered a risk-free investment. 

Adds Shah: “From an interest rate point of view, it is quite good, compared to FDs. Even with the annual rate revision, this rate is fairly attractive.” 

Currently, the interest rate is an impressive 8.5 per cent per annum. It’s tax-efficient as well. The VPF contribution is eligible for deduction under Section 80C within the overall limit of Rs 1.5 lakh. 

Gopal Bohra, partner, NA Shah Associates, says: “The tax treatment of voluntary contribution is EEE —contribution is exempt under Section 80C, interest income is exempt, and withdrawals after five years are also tax-free — making it an excellent tax-saving option.”

However, VPF falls short when it comes to liquidity. 

Iyer says: “While VPF’s three parameters are excellent, it is a fairly illiquid instrument, as this is meant for the long term and you won’t be able to touch this money.” You can make partial withdrawals though. 

Bohra says: “Contribution to VPF is tax-free if withdrawn after five years of contribution. However, if the amount is withdrawn within five years of contribution, the interest earned on such voluntary contribution shall be taxable. Looking at its tax advantage and liquidity after five years, it is one of the most tax-efficient investment yet (not very popular with the salaried class).”

To subscribe under VPF, you must ask your employer in writing, any time within the financial year. So should you invest? Iyer says, “When it comes to wealth creation, you have to look at liquidity along with other parameters, and keeping those in mind, MFs are primary wealth creators. In the current situation, if it is money for the long term (8-10 years) and a part of your long-term wealth debt allocation, you should go ahead. Remember liquidity is a big consideration when you invest.” 

Another long-term tax-efficient option is public provident fund (PPF). But Shah says VPF should be your first instrument in your debt portion, and self-employed should go for PPF. 

With things looking quite uncertain in India as well as globally, it might not be a bad idea to put some money away in VPF because of higher rates.