Here’s why you should prefer VPF over NPS
Tax liability of individuals earning higher salary (monthly basic salary of more than Rs 3 lakh) has significantly gone up with the government putting a cap of Rs 7.5 lakh on employer’s annual contribution to provident fund, Nation Pension System (NPS) and superannuation fund. The excess contribution over Rs 7.5 lakh will be taxable from April 1, 2020.
This proposal will increase the tax liability of high earners significantly. To understand this let us take an example of an individual who earns a monthly basic salary of Rs 3 lakh. In this case, the employer’s annual EPF contribution will be Rs 4.32 lakh (12% of basic salary) and NPS will be Rs 3.6 lakh (10% of basic salary). Here the total employer’s contribution to EPF and NPS is Rs 42,000 more than the annual limit of Rs 7.5 lakh. So the amount of Rs 42,000 will be added to the taxable income of the individual and will be taxed at 30% along with surcharge and cess.
While high earners have no other option than paying tax on contribution beyond Rs 7.5 lakh, they can tweak their salary structure by diverting the employer’s contribution to NPS to Voluntary Provident Fund (VPF). Under VPF, employees can contribute beyond the mandatory 12% limit to EPF, which offers a guaranteed interest rate of 8.65% (at present) and holds the ‘Exempt, Exempt, Exempt’ (EEE) status. Individuals can contribute up to 100% of the basic towards VPF.
Financial planners say VPF can be an effective tool to increase retirement corpus, given the safety of assured income and EEE status. Although VPF won’t help in reducing taxable salary, it should be considered as there is no upper cap on VPF contribution and the funds grow at the same rate as EPF and the proceeds are tax-free on maturity. But in case of NPS, 40% of the maturity amount has to be compulsorily invested in low-return yielding annuity schemes and any lump sum withdrawal beyond 40% will be subject to capital gains tax…Read more>>