Have Voluntary Provident Funds lost their sheen after Budget 2021?
Would it be advisable for you to look past VPF while making a venture portfolio?
Pay acquired from Provident Fund (PF) commitments may become available for you. In the new Budget, the Finance Minister reported that the premium procured on representative commitment towards PF surpassing Rs 2.5 lakh in a year would be available from the first of April 2021. Previously, many picked Voluntary Provident Funds (VPF) so that they could offer more towards PF and profit of its tax-exempt advantages.
Would it be a good idea for you to look past VPF while making a venture portfolio?
As a matter of first importance, we should comprehend VPF?
VPF is an expansion of your Employee Provident Fund (EPF) which is accessible to all salaried people. Under the EPF set-up, the representative, just as the business, necessarily contributes 12% of every one of the essential compensation towards the EPF record of the worker. Any commitments made by the representative past such limit becomes willful and subsequently the name. According to the principles, a representative can contribute up to 100% of one’s fundamental compensation (counting dearness recompense) in a monetary year as a feature of VPF commitments. In any case, the business isn’t under any commitment to coordinate with his commitment.
High coupon rate
VPF is connected to your current EPF and loan costs on its commitments are as old as of EPF. For the monetary year 2019-20, its loan cost was 8.5% p.a and is declared each year by the EPFO. VPF commitments have been well known among individuals because of their generally higher loan fees when contrasted with Public Provident Fund (7.1% p.a) and other little saving plans. Commitments made towards PF (counting VPF) are likewise permitted as a derivation from pay under Sec 80 C of the Income charge Act.
How can it function?
Assuming you procure a pay of Rs 1 lakh a month, out of which 40% contains the essential compensation part. Under the standard set-up, your boss contributes 12% of your essential compensation or Rs 4,800 (12% of Rs 40,000) towards EPF, while one more 12% is contributed for your sake.
Assuming you picked VPF and offered another half of fundamental compensation – then, at that point, you’re in general PF commitment each month would be 62% of essential compensation. It works out to Rs 24,800 per month or Rs 2,97,600 in a year. While prior, premium procured on these steady commitments were totally tax-exempt, from April first – overabundance commitments over Rs 2.5 lakh will be charged at your minimal rate. Keep in mind, a business’ commitment towards EPF isn’t considered for tax assessment purposes.
Interest rates on EPF funds have been falling down over the years and are currently at a seven-year low. From a high of 8.8% p.a. in 2015-16, interest rates have come down to 8.5% in 2019-20. EPFO, which manages employee provident funds, typically invests 85% of their annual inflows into debt instruments, while the rest goes into equities (exchange-traded funds). Ultimately, rates decided by EPFO trustees have to be in sync with market rates.
An individual in their 30s and 40s are better off taking larger exposure in equities (than above) – which could earn 11% or more annually on their investments. While the income earned on PF would soon lose its tax-free status, it will also lose its luster once the Direct Tax Code (DTC) comes into effect. Under the DTC provisions, the entire maturity amount is set to become taxable.
Moreover, there is the looming provision of the New-Wage Code. From April 1 of this year, the basic salary component is mandated to be at least 50% of your overall salary. This in turn could increase your annual EPF contributions as well as tax liabilities. While it is currently applicable only for low-income people (Rs 15,000 or lesser), it could have greater repercussions if this income threshold is done away with under the Social Security Code.
How to withdraw
VPF contributions don’t require any separate registration. Usually, the employee intimates her HR or accounts department in writing about it by specifying the amount she wants to invest for the year. Once you do it, you can’t change it midway during the year.
If you want to opt out of VPF, intimate your HR or accounts department in writing before the start of the financial year. There is a lock-in period of five years, during which a penalty is applicable for premature withdrawal. After that, you can withdraw the whole amount.
Taxation on interest earned from VPF contributions has taken the zing out of the investment product. Moreover, with DTC looming large, it’s time investors start looking beyond assured return schemes and into market-linked products like mutual funds.