Voluntary Provident Fund (VPF) facility is available to salaried employees wherein they can contribute more than 12% of the Basic Pay+Dearness Allowance (DA) towards their EPF accounts. Employees are allowed to contribute up to 100% of their Basic Salary and DA. The interest rate on VPF contribution is the same as the EPF interest rate (currently 8.15%).

As salaried employees also invest in tax-saving schemes like PPF, which is currently offering an interest rate of 7.1%, they often face a dilemma of whether to increase their VPF contribution or invest in schemes like PPF for tax saving and investing for retirement.

Experts say that the choice between increasing VPF contribution or investing in PPF should be based on the financial goals and the current financial situation of the employee. For instance, if you increase VPF contribution, you may face liquidity issues as your in-hand monthly salary will be reduced.

Also Read: EPF Interest Rate 2022-23: PF rate increased!

“Voluntary Provident Fund (VPF) and Public Provident Fund (PPF) are both investment options available for salaried employees in India. While both VPF and PPF offer attractive returns and tax benefits, the choice between the two depends on various factors such as investment goals, risk appetite, and financial situation,” says CA Amit Gupta, MD, SAG Infotech.

VPF is a long-term investment. Employees can increase their VPF contribution if they are comfortable with locking in their money for a longer period. “It is also essential to consider the current financial situation before increasing VPF contributions, as the additional contributions could impact short-term liquidity needs,” says Gupta.

However, employees, who are investing in PPF for tax-saving purposes, may consider increasing their VPF contribution instead of PPF as the interest rate offered by EPFO is higher.

Also Read: Salaried? VPF can help you retire with tax-free and guaranteed Rs 3 crore in 30 years

Additionally, contributions made towards VPF are also eligible for tax deduction under Section 80C. So for example, if your current EPF contribution is not Rs 1.5 lakh/year and you are investing in PPF to meet the shortfall, you may benefit more by increasing EPF contribution through the VPF route.

“From a tax perspective, contributions made towards VPF are eligible for tax deductions under Section 80C of the Income Tax Act, 1961. The maximum deduction limit under Section 80C is Rs 1.5 lakh for the financial year 2022-23,” says Gupta.

How much should you invest in VPF?

In VPF, you can invest up to Rs 2.5 lakh per year without attracting extra tax. Of this amount, Rs 1.5 lakh will qualify for deduction under Section 80C. But before increasing the VPF contribution, you should assess your current EPF and VPF contributions and make sure you do not go over the statutory limit of Rs 2.5 lakh/year.

“You can determine your required EPF contribution amount in one of two ways: by looking on your pay stub for the required EPF contribution amount, or by subtracting 12% from your base pay. The maximum amount you may invest in VPF is equal to your compulsory EPF payment for the year divided by Rs 2.5 lakh,” says Gupta.

Also Read: Why you should continue to invest in Public Provident Fund (PPF): 5 reasons

VPF is a volunteer program. You can get the same tax benefit as in PPF plus extra interest. But you should also consult your financial advisor to better understand your requirements and plan as per your retirement goals.

“You should consult with a financial advisor to determine the amount you should contribute towards VPF, taking into account your overall financial plan and investment objectives,” suggests Gupta.