Keep this in mind, many would like to go the VPF route and increase their EPF contribution. Do you know that doing so not only provides higher returns on your savings, but also ensures that the interest earned through EPF and VPF contributions remains tax free?
This is because with effect from 1st April, 2021 (FY 2021-22), the interest accrued from epf account Will be taxable if the employee’s own contribution exceeds the specified amount. This specified limit also includes the contribution made by the employee to the EPF account through Voluntary Provident Fund (VPF).
Thus, if an employee’s own contribution through EPF and VPF in a financial year exceeds Rs 2.5 lakh, the interest earned on the additional amount will be taxable in the hands of the individual. An additional EPF account will be opened to credit the interest earned on the additional contribution.
So, how much should you invest through VPF to ensure that the interest earned from both EPF and VPF contribution is not taxable? Effectively, the total EPF account contribution through EPF and VPF should not exceed Rs 2.5 lakh in a financial year. However, the answer to the question depends on the mandatory EPF contribution you make every month.
There are two ways to know your mandatory EPF contribution:
a) Check mandatory EPF contribution from your pay slip.
b) Calculate 12% of your basic salary to know the mandatory EPF contribution.
Once you know your mandatory annual EPF contribution, it needs to be deducted from Rs 2.5 lakh. This will give you an idea of ​​how much you can invest through VPF.
Here is an example of how you can calculate your annual VPF contribution.
Suppose you are earning Rs 30,000 per month as basic salary. The mandatory EPF contribution comes to Rs 3600 per month (12% of Rs 30,000). The annual EPF contribution is Rs 43,200 (Rs 3600 X 12). You can invest a maximum of Rs 2,06,800 (less than Rs 43,200 to Rs 2.5 lakh) through VPF in a financial year. This is the maximum amount that you can invest while ensuring that the interest earned remains tax-free in your hands.
If you are a government employee
For government employees or those employees whose employers do not contribute to the EPF account, the limit is Rs 5 lakh instead of Rs 2.5 lakh. Using the example above, one can invest a maximum of Rs 4,56,800 (less than Rs 43,200 by Rs 5 lakh) through VPF.
not just a one time exercise
Once the VPF contribution is known you should not assume that the same amount will continue in future years also. This is because every time you receive an increment, your mandatory EPF contribution also increases. Thus, you must ensure that you can contribute through VPF in future years also without crossing the tax-free limit.
Continuing the above example, suppose that after the assessment session, the basic pay is increased to Rs 35,000. The annual mandatory contribution comes to Rs 50,400. Hence, the maximum amount that can be contributed through VPF will come down to Rs 1,99,600 (Rs 2.5 lakh less from Rs 50,400).