Should an employee opt for a voluntary provident fund?

A voluntary provident fund contribution is an additional contribution by an employee to their EPF account. The contribution is above the mandatory PF contribution made by the employer and employee. The EPF account helps build retirement savings during your employment tenure. You will receive an interest of 8.5% p.a. on the balance in an EPF account.

You must contribute to your EPF account at 12% of your basic salary and dearness allowance. Your employer then matches your contribution and deposits on your behalf and theirs into your PF account. Thus, your EPF account consists of your contribution, your employer’s contribution and the interest accrued on both the contributions.

In addition to the mandatory contribution, you can choose to make an additional contribution to your EPF account, namely voluntary provident fund contribution. You can make a maximum voluntary contribution of up to 100% of your basic salary and dearness allowance. However, the employer does not make a voluntary matching contribution. 

Also Read: Can PPF and SCSS Survive Without Tax Benefits?

The voluntary contribution made will be reduced from your salary. You need not worry about the procedure to contribute. Once you opt for the voluntary PF contribution, the employer will contribute on your behalf. The salary you receive in hand is after deducting the mandatory and optional contribution. 

The mandatory and voluntary contributions are entitled to a tax deduction of up to Rs 1.5 lakh under section 80C. You can make contributions during your employment until retirement. In case of a change in employment, the PF account is transferable from the existing employer to the new employer. Thus, the contributions to EPF carrying tax benefits are transferable and build a risk-free retirement corpus. 

You can withdraw the accumulated amount at any time. A withdrawal made after five years of continuous service is exempt from tax. However, in case you retire before five years of uninterrupted service, the amount withdrawn is taxable in the below manner:

  1. Interest earned on the employer’s contribution and employee’s contribution is payable as ‘income from other sources’;
  2. Principal amount consisting of employer’s contribution is taxable as ‘salary’;
  3. The principal amount consisting of employee’s contribution is payable to the extent the employee has claimed deduction under section 80C in the year(s) of contribution. The amount is taxable as ‘salary’.

To calculate for five consecutive years, you should transfer the PF to the new employer (change in employment). There are few exceptions where the amount withdrawn before five years is not taxed. A withdrawal made before five years due to your ill health or discontinued business of the employer or for any other reason beyond the control of the employer, the same is exempt from tax. 

From the perspective of long-term retirement savings, EPF offers a rate of interest of 8.5%, which is higher than 7.9% for PPF. Also, in PPF, you have to open a separate account with a post office or bank and regularly make deposits from the salary received in hand. Unlike PPF, a voluntary contribution to EPF is secure and does not burden the disposable wage. 

If you opt for a voluntary PF, you have to intimate your employer’s HR, and the contribution is tagged to your PF account.

Your PF account can be managed online under the EPFO’s portal. The EPFO designates a UAN (Universal Account Number) to each employee who enrols for EPF for ease of operating their account.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in

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