EPF vs. VPF Investment Benefits: Salaried individuals often aim to invest for the future to avoid financial difficulties. They contribute to schemes managed by the Employees’ Provident Fund Organisation (EPFO), such as the EPF. A portion of an employee’s salary is allocated to both the EPS (Employees’ Pension Scheme) and the EPF.
Another scheme offered by the EPFO is the VPF (Voluntary Provident Fund). This is a strategy that allows you to build a substantial retirement corpus while avoiding the risks associated with the stock market, bonds, or other asset classes. Participating in these schemes helps individuals secure their financial future.
Learn about the components of EPF
You might be surprised to learn that the EPF is an excellent scheme that plays a crucial role in an employee’s future planning. EPF involves a mandatory contribution: 12% of your basic salary is deducted and deposited into the fund every month, and your company contributes an equal amount.
Additionally, there is an EPS component. In reality, the entire 12% contribution made by the company does not go into your PF account; it is split into two parts—one goes to the EPF and the other to the EPS.
How the fund can double
If you utilize your money wisely, your fund can grow significantly. You have the option to voluntarily increase your contribution beyond the mandatory 12% limit, potentially contributing up to 100% of your basic salary to the PF. For instance, if your total salary is ₹30,000—with a basic salary of ₹15,000—you can deposit a maximum of ₹15,000 into the EPF.
It is important to note that the EPFO has capped the maximum basic salary limit for this purpose at ₹15,000. This means that even if your actual basic salary is ₹50,000, the deduction under VPF is limited to ₹15,000.
What are the benefits of VPF?
On this additional investment, you earn the same secure compound interest that the government offers on standard PF contributions. If you start allocating even a small portion of your savings to VPF each month, the power of compounding (earning interest on interest) can help your retirement fund grow to twice the size you might have expected. It is an ideal option for those who wish to avoid the risks associated with mutual funds or the stock market.
What mistakes should you avoid?
Making the most of VPF requires a degree of discipline. Many people tend to withdraw funds from their PF accounts to meet minor, immediate needs. Frequent withdrawals prevent the true magic of compounding from taking effect.
Therefore, if you genuinely aim to build a substantial, risk-free retirement fund, avoid the mistake of making frequent PF withdrawals. People often withdraw their PF balance from a previous employer instead of transferring it when changing jobs.
