Context: Financial planning plays a vital role in our life as our future is dependent on the same. Across the globe, most individuals work for at least 30 years starting from the age of 25. They lead a lifestyle that may or may not match their earnings, without a focus on post-retirement needs, paving way to improper financial planning and financial crisis during old age.
When we have the energy to work, the talent to acquire evolving skills, the capability to face global customers and so on, I’m sure we would also be able to understand the importance of financial planning to lead a decent retired life. One of the important causes of leading an unplanned lifestyle is a lack of knowledge on various financial avenues available to us. With the frequently changing tax regulations, an employee is left with just a handful of opportunities to save for the future and implement proper financial planning for themselves. The purpose of this article is to provide an insight on the various savings vehicles available in India.
Voluntary Provident Fund
The avenues to save our money are enormous. However, the focus of this article is only on the importance and impact of voluntary provident fund (VPF) contributions. Let’s first understand the concept of the employee provident fund (EPF). Its purpose is to provide employees with a lump sum payment on retirement. According to the present EPF & MP Act, 12% of an employee’s basic salary (capped at INR 15,000) is contributed toward their EPF account, with the same contribution from the employer as well. Such contributions earn interest which changes every year and is likely to be at 8.65% for the FY 2019-20. Let’s look at an example for EPF contributions:
| Name | Basic Pay | Employee Contribution (12%) per month | Employer Contribution (12%) per month |
|---|---|---|---|
| Mr.John | 10,000 | 1,200 | 1,200 |
| Mr.Zahir | 20,000 | 2,400 | 2,400 |
| Mr.Siva | 30,000 | 3,600 | 3,600 |
Having discussed about EPF, let’s now look at the concept of the VPF. As the name indicates, this is a type of saving element which an employee could opt for, if required. Under the VPF, an employee can contribute anywhere from 1% to 8% of their basic pay toward VPF and start or stop the contributions ‘n’ number of times without any restrictions or charges/fees.
Different organizations may have different limits on the contributions. An employee of HCL could contribute up to 8% of their basic pay toward VPF for which the annual interest would be as applicable as to the EPF. The employer is not liable to make matching contributions as this is not mandatory per the PF Act.
However, industry experts suggest that VPF is one of the most prudent investment options for the employees to manage post-retirement needs. Let’s take an example for VPF contributions:
| Name | Basic Pay | Employee’s monthly contribution % towards VPF | Employee’s monthly contribution amount towards VPF |
|---|---|---|---|
| Mr.John | 10,000 | 3% | 300 |
| Mr.Zahir | 20,000 | 5% | 1,000 |
| Mr.Siva | 30,000 | 8% | 24,00 |
For those who are curious to know how much to save and what would be the interest, the below table would help with approximate calculations:
| Basic Pay | VPF % | VPF Contribution p.m. | VPF Contribution p.a. | Interest p.a. | Total Contributions (Year 1) | Total Contributions (Year 2) | Total Contributions (Year 3) | Total Contributions (Year 4) | Total Contributions (Year 5) |
|---|---|---|---|---|---|---|---|---|---|
| 10000 | 1% | 100 | 1200 | 60 | 1260 | 2630 | 4120 | 5740 | 7500 |
| 10000 | 2% | 200 | 2400 | 120 | 2520 | 5260 | 8240 | 11480 | 15000 |
| 10000 | 3% | 300 | 3600 | 180 | 3780 | 7890 | 12360 | 17220 | 22500 |
| 10000 | 4% | 400 | 4800 | 240 | 5040 | 10520 | 16480 | 22960 | 30000 |
| 10000 | 5% | 500 | 6000 | 300 | 6300 | 13150 | 20600 | 28700 | 37500 |
| 10000 | 6% | 600 | 7200 | 360 | 7560 | 15780 | 24720 | 34440 | 45000 |
| 10000 | 7% | 700 | 8400 | 420 | 8820 | 18410 | 28840 | 40180 | 52500 |
| 10000 | 8% | 800 | 9600 | 480 | 10080 | 21040 | 32960 | 45920 | 60000 |
Let’s assume that a person aged 30 with a basic pay of INR 10,000 contributes a maximum of 8% (INR 800) of his basic pay toward VPF. He would have contributed INR 48,000 (INR 800 x 60 months) and earned an amount of INR 12,000 as interest, thereby ending up with a corpus of INR 60,000 at the end of five years, making it one of the better investment options.
Conclusion: All employees should definitely contribute toward VPF because of the facts such as– (1) the interest earnings are not taxed, (2) the contributions are completely locked for retirement needs since premature withdrawals/closures are not encouraged, and (3) the maximum limit of contributions toward VPF is a small amount that could be compromised. All these factors make VPF one of the most sensible investment options.
It is never too late and hence those who have not made any VPF contributions, MUST start utilizing this savings vehicle immediately– i.e. even from the next month onwards. The success of this article depends on the number of new enrollments for VPF and you could also be part of the success factor.
We shall discuss rest of the investment vehicles in the next article.
