The Provident Fund system in India has come a long way and has substantially been digitized but yet the general public perception is one of bureaucracy and having to live with no alternative, especially the Salaried class in the organized sector.
The Universal Account Number (UAN) was introduced on October 1st, 2014 so that employees have a common 12 digit PF identity no, which does not change from one employer to another and provides ease in transferring balances or withdrawing from it as per the PF Scheme. It is now over 5 years and most employees have a UAN No and can online view their PF balances and not any longer lost in the dust heap of physical files in the Department.
PF Interest @ 8.65%
Last week on February 21st, 2019, the Labour Ministry announced an increase in interest rates on PF balances from 8.55% to 8.65% for the current financial year 2018-19. Considering, the safety of investment and visibility, the salaried class who are at the highest marginal rate may consider an additional PF contribution as VPF, subject to a maximum of the Basic Salary. It’s perhaps amongst the best investment opportunity completely tax-free and with a sovereign guarantee. If one were to benchmark this against the Bank Fixed Deposit rate of 7.5%, which is taxable and if a tax is at 30%, it would give a net interest yield of 5.25 %. Thereby on VPF, you can obtain at least 3.4% extra interest, which is 65% higher than Bank Interest. This is assuming the Employee is having a taxable income above Rs 10 lacs per annum.
Read more at: PF interest rate hiked to 8.65%
Withdrawal & Lock In’s
In as much as many mutual fund investments, there is a 5-year lock in for VPF portion of employee contribution barring for some significant events and emergencies like house construction, child’s education, marriage or health exigencies.
- A concerned employee needs to write to the HR/Accounts dept requesting them to increase PF contribution by the amount they desire subject to 100% of the Basic Salary.
- A VPF form needs to be filled in and signed and then submitted to the Accounts/HR dept. This only requires the details such as the amount you would like to contribute to PF from your salary.
- Once opted for VPF, one can discontinue mid-way. However, some companies may have the policy to discontinue only at the end of the year to prevent frequent changes from an administrative perspective.
- VPF is only available to the salaried class.
Although VPF is a great investment avenue to the higher income salaried class, it’s perhaps amongst the least used and not much talked about by Investment Advisors.