Voluntary Provident Fund (VPF): Interest Rates, Benefits, and Tax Rules

What is a Voluntary Provident Fund (VPF)?

The Voluntary Provident Fund is simply a voluntary extension of your existing provident fund account.

If you are a salaried employee of a registered company, 12% of your salary, including dearness allowance, is mandatorily deducted and deposited into your EPF account by law. Your employer will, of course, make a matching contribution to the provident fund account and a pension scheme account.

With VPF, you can now tell your HR department, "You know what? I want to save 10% (or 20%, or even 100%) of my salary in my provident fund account, in addition to the mandatory 12%." Now, what are the key points to remember about VPF?

• No New Account Required: Your VPF contributions are deposited into the exact same account as your existing EPF account. Your VPF account has the same Universal Account Number (UAN) and passbook as your existing account.
• No Employer Matching: Your VPF contributions are just that - your contributions. Your employer is not required to make a matching contribution to the VPF account. Your employer will continue to make a mandatory 12% matching contribution to the provident fund account and a pension scheme account.
• Salaried Employees Only: VPF is simply a voluntary extension of the EPF account, so VPF accounts are only available to salaried employees. Self-employed people cannot open a VPF account.

The Big Question: What are the interest rates?

When deciding between fixed-income options, you might place fixed deposits offered by banks against your familiar EPF/PPF accounts to determine where your money grows best. On this criterion too, VPF emerges as a runaway winner.

For the financial year 2025-26, the Employees' Provident Fund Organisation (EPFO) has set an interest rate that is simply too good to pass up - 8.25% annually. This interest is applicable to both your mandatory EPF savings and voluntary VPF savings. Interest on EPF and VPF is calculated monthly on the running balance and credited to the account once every financial year. It is not very common to find a risk-free investment with an interest rate this high from the government, making VPF an essential part of a low-risk financial plan.

The Big Upside of Going Voluntary

Why bother saving more of your salary when you could invest in mutual funds or gold? Well, here are some reasons why millions of Indians are relying on the Voluntary Provident Fund (VPF):

• Rock-solid safety: Your money is under the regulation and administration of the Government of India. Unlike the stock market, which can dip at any time, your money in the Voluntary Provident Fund is sure to rise.
• No temptation to spend: Since you're not getting the money directly into your account, the temptation to spend it is gone. It's like saving for retirement automatically.
• No need to juggle passwords: Your money is saved in one place. Your voluntary contributions are saved alongside your mandatory contributions. All you need is one password to log into the EPFO portal.

Understanding the Tax Rules (The Hidden Catch!)

VPF has always enjoyed the prestigious status of an Exempt-Exempt-Exempt (EEE) scheme. Your contributions are eligible for tax deduction under Section 80C up to ₹1.5 lakh, the interest earned remains tax-free, and even the final withdrawal is tax-free.

However, there has been a recent change in tax rules that must be understood and implemented by all investors. Financial planners across the industry recommend that EPF/PPF and VPF should be clubbed together for creating a safety net for retirement savings. To achieve this effectively, there is an important aspect that needs to be remembered.

The ₹2.5 Lakh Rule:

The government has introduced a new rule whereby if the total employee contributions towards mandatory EPF and voluntary VPF exceed ₹2.5 lakh in a financial year, the interest earned on this amount will attract taxation according to your income tax slab.

Let's take a simple example to understand this better. Assume your annual compulsory contribution to the EPF is ₹1,50,000, and you want to invest aggressively by saving more through VPF by contributing an additional amount of ₹1,50,000.

• Your total contribution = ₹3,00,000.
• The tax-free limit is ₹2,50,000.
• The excess amount is ₹50,000.

The interest of 8.25% on this amount of ₹50,000 will form a part of your income that is liable to tax for the year, whereas the interest on the amount of ₹2,50,000 is tax-free.

Withdrawal Rules and Liquidity

Assume you suddenly want to buy a car or a vacation home. You are not able to withdraw your VPF amount as it is meant for your old age. The withdrawal rules are almost the same as your existing EPF/PPF rules, which are not too liquid.

• Full Withdrawal: You have the option to withdraw your entire EPF and VPF savings when you retire or have been without a job for more than two months. However, the catch is that you will only be able to do so completely tax-free only when you have completed five consecutive years of service, regardless of how many different companies you have worked for.
• Partial Withdrawals (Advances): You have the option to make a partial withdrawal for major events in your life. These include a medical emergency, a wedding, or a marriage within your family, education for your children or siblings, or the purchase or construction of a home.

Conclusion

Just because you have more money, it doesn't mean you have to go and invest it in a way that is highly risky or requires you to be a genius at predicting the ups and downs of the stock market. Sometimes, it is the safer options that pay off in the long run. The Voluntary Provident Fund is a good option for salaried workers, and with guaranteed high interest and minimal stress, it is a good option for those interested in growing their wealth. So, if you regularly perform an EPF balance check and want a hassle-free way of growing your wealth, then sending a quick email to your HR department might be the best decision you ever make.