Voluntary Provident Fund is one of the best savings schemes that allow investors to earn guaranteed returns and grow their corpus steadily. The interest rate on VPF hovers around the 8.50% per annum and the returns generated are tax exempt as well. The VPF Interest Rates are revised by the government every year.
Interest for a Voluntary Provident Fund is calculated monthly based on the opening balance of each month. This opening balance includes both EPF and VPF. The balance is credited to an EPF account at the end of a financial year.
Individuals must note that VPF interest for the first month is nil since the opening balance of the first month is zero. To calculate the monthly rate of interest of VPF, it is divided by 1200 and then multiplied by a month’s opening balance.
Let us understand this with the help of an example-
Example: Ranjan joined Company XYZ for a salary of Rs. 30,000 on 1st April 2020. As per the EPFO mandate, his contribution to his EPF account is 12% of his salary. However, he decides to contribute an additional 8% per month to VPF. His employer pays 3.67% of Rs .15000 as his contribution to Ranjan’s EPF account. Also, the VPF interest rate in 2020 is 8.5% per annum.
The table below illustrates the interest calculation on Ranjan’s EPF account.
|Month||Opening Balance||Interest (Rs.) [(Opening balance x VPF interest rate) / 1200]|
|May||6550 [(20% x 30000) + (3.67% x 15000)]||46|
Note: We are assuming that Ranjan’s salary remains the same throughout the year.
Therefore, Ranjan earns Rs. 3,062 as an interest in the balance in his EPF account. Since he made an additional contribution of 8% over and above the compulsory percentage to the Voluntary Provident Fund scheme, Rs. 3,062 also constitutes of the VPF interest amount.
However, in VPF accounts, the individuals can choose to allocate a greater percentage of their salary to maximize their returns.
Historical Voluntary PF Interest Rates.
In the past 40 years, the Provident Fund scheme has been one of the most profitable and secure investment options for working individuals. When compared with other such savings schemes such as Bank FD and Public Provident Fund, the VPF interest rates are always marginally higher.