When to start voluntary contributions to your PF?

The voluntary provident fund (VPF) has been a topic of interest for many individuals who are looking to increase their retirement savings. With rising life expectancy and longer retirements, it is essential to ensure that you are saving enough for your golden years. The VPF allows individuals to contribute more to their Employee Provident Fund (EPF), providing an opportunity to enhance their retirement corpus.

Historically, EPF has been a solid retirement savings tool, but for most, it may not be sufficient on its own. This has led to many individuals considering the option of increasing their contributions via VPF. However, it is important to understand the taxation implications of such a decision.

In the 2021 Budget, the government announced that if an employee’s total annual contribution to EPF (including VPF) exceeds Rs 2.5 lakh, the interest earned on the incremental amount above Rs 2.5 lakh will be taxable as per the employee’s tax slab. This means that for contributions beyond Rs 2.5 lakh, the interest earned will be subject to taxation.

It is important to consider the taxation implications when deciding whether to start or increase VPF contributions. If an individual’s EPF contribution is below Rs 2.5 lakh in a year, it may be beneficial to start VPF with an amount that brings the total contribution to EPF+VPF to Rs 2.5 lakh. Additionally, if there is a need to invest more in debt, the Public Provident Fund (PPF) can also be considered as it offers tax-free interest up to Rs 1.5 lakh contribution.

It is crucial to first ensure that the asset allocation between equity and debt is appropriate before considering VPF contributions. For those with a risk appetite and longer time horizon, investing in equity funds via mutual funds can also be a viable option to generate inflation-beating returns in the long term.

In conclusion, while the decision to start or increase VPF contributions is an important financial choice, it is equally crucial to ensure that the overall asset allocation is aligned with one’s financial goals. Consulting with an investment advisor can provide valuable insights and guidance in planning for retirement.