Provident Fund Query: Contributing 100% of Basic Salary to VPF; Is it eligible for Section 80C deduction?

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Updated: Apr 29, 2020 9:26 AM

VPF is the voluntary contribution by employees towards their provident fund account over and above the 12% contribution towards EPF.

VPF account offers the same interest as the EPF (8.5% for FY20) which is revised annually.VPF account offers the same interest as the EPF (8.5% for FY20) which is revised annually.

My monthly income is Rs 2 lakh and my wife earns Rs 1 lakh a month. We invest 100% of our basic salary in Voluntary Provident Fund. Will all the VPF investments and returns and maturity withdrawals after five years be completely tax free? Do we have right investment approach?
– Nikhil Bhatia
VPF is the voluntary contribution by employees towards their provident fund account over and above the 12% contribution towards EPF. The maximum contribution allowed under VPF is up to 100% of the basic salary and dearness allowance. VPF contributions are eligible for tax deductions under Section 80C. Like EPF, they enjoy EEE (exempt-exempt-exempt) status, i.e. the amount invested up to Rs 1.5 lakh are deductible), interest earned, and maturity proceeds are exempt from tax. VPF account offers the same interest as the EPF (8.5% for FY20) which is revised annually. However, as interest rates reduce, the probability of achieving a targeted corpus over long periods would also tend to reduce. Hence, for long-term goals it is advisable to invest in equities and other asset classes, returns from which tend to be higher than inflation over the long term (7 to 10 years and above). VPF contributions are subject to a lock-in period which is the same as that for EPF accounts. For portfolio construction, an asset allocation-based approach (mix of equity and debt) should be followed as it is one of the key determinants of the portfolio’s performance. Higher the investment horizon and risk appetite, higher can be the allocation to riskier asset classes such as equity. With the existing emergency corpus as a backup and based on your risk assessment, you may contribute the fixed-income portion of your overall portfolio to the VPF account to benefit from the higher yield and favourable taxation on offer. You may also consider parking your emergency corpus in high credit quality debt mutual funds, which enjoy favourable taxation compared to FDs if held for more than 3 years.

As I want to redeem some units from my equity MF SIP, how long will it take to credit the money into my account?
—Vikas Kumar
In case of redemption from equity funds, the proceeds are credited to your account on a T+3 days basis for equity funds (T being the transaction date).

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonal finance@expressindia.com

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