The central government has approved 8.1% annual rate of interest on EPF deposits for the financial year 2021-22. Though this is one of the lowest rates given on EPF deposits in the last 40 years, it is still probably the best interest rate being offered among safe fixed income investment options like the PPF, NSC, RBI savings bonds etc. Further, most big banks are still offering an interest rate 6% or less on their fixed deposits to the general public and around 6.5% to senior citizens.
While employees typically go for statutory contribution of 12% of basic pay towards EPF, which is matched by employer contribution, however, employees can contribute over and above this limit through the Voluntary Provident Fund (VPF). The interest rate on VPF is the same as that of EPF. This means that your VPF contribution will also earn 8.1%, which is tax exempt up to Rs 2.5 lakh total contribution (EPF and VPF taken together) in a given financial year.
Though you also have the option to put your surplus money in Public Provident Fund (PPF), the current rate offered on PPF is only 7.1% which is lower than the 8.1% offered on VPF. Moreover, you cannot deposit more than Rs 1.5 lakh annually with PPF. This is why VPF scores much higher than PPF. Therefore, if you have any surplus funds for long term investment into a fixed income product then VPF still comes out as the top performer not only in terms of returns but also in terms of tax efficiency.
How to calculate maximum tax-exempt contribution for VPF
To get the maximum advantage of the higher interest rate on VPF you need to calculate your statutory annual deduction amount of EPF and then you can plan your maximum VPF contribution within Rs 2.5 lakh tax exemption limit. You can also calculate this through your basic salary — 12% of your basic salary is what goes towards employee contribution. For instance, if your basic salary is Rs 50,000 per month or Rs 6 lakh per annum, then 12% of Rs 6 lakh which is Rs 72,000 is your annual contribution towards EPF. This means that you can contribute up to Rs 1.78 lakh toward VPF or Rs 14,833 per month towards VPF without any tax on your contribution.
Higher rate possible in future
The interest rate cycle has reversed after 2 long years during which time we saw interest rates getting cut to the lowest levels seen the last two decades. Global inflation has reached a record high and to contain it most countries are raising their interest rates. With no clear signs of inflation coming under control in the near future, the interest rate hikes are likely to continue for a good part of this year. The 8.1% interest declared by the central government is for the last financial year, i.e., FY 2021-22, and since the interest rate cycle has reversed, the likelihood of a much higher interest rate on EPF/VPF for the current year 2022-23 cannot be ruled out.