Know the Tax Efficiency of Voluntary Provident Fund

Voluntary Provident Fund (VPF) is a savings-cum retirement option and a further extension of the Employees’ Provident Fund (EPF). It is a voluntary scheme for salaried employees. Under the VPF, the employees can contribute a higher amount to their EPF account every month.  Contribution VPF is eligible for deduction under section 80C.  Every month, both employees and employers must contribute 12% of the employee's basic salary towards EPF. The interest rate applicable to the EPF (VPF as well) contributions is 8.25% for FY 2025-26. We have covered the following in this article.

What is VPF?

Under the Employees’ Provident Fund (EPF) provisions, both employees and employers contribute a certain amount every month. The minimum contribution that an employee should make is 12% of their basic salary. The employer will also make an equivalent contribution.

However, the employee’s contribution is not restricted, they can invest how much ever they want, but the employer’s contribution is restricted to the bare minimum.

Whatever the amount contributed by the employee that exceeds the minimum requirement is termed as the Voluntary Provident Fund (VPF), there is no capping on the amount that can be contributed towards VPF. The contributions made towards VPF are eligible for tax deductions under Section 80C of the Income Tax Act, 1961.

Is VPF more beneficial than other tax-saving investments?

• Contribution to VPF is allowed for deduction under section 80C up to the limit of Rs. 1,50,000
• Withdrawal after 5 years of continuous service shall be tax-free.
• If contributions made to VPF and EPF combined exceed the limit of Rs. 2,50,000 in a year. Interest earned over the contribution amount of Rs. 2,50,000 will be taxable that year.
• Premature withdrawal of VPF account (Before 5 years), then interest earned shall be taxable, and the 80C deduction claimed earlier shall be taxed back in the year of withdrawal.
• The Voluntary Provident Fund (VPF) is one of the tax-saving investments covered under Section 80C of the Income Tax Act, 1961. It offers tax deductions of up to Rs 1,50,000 a year and taxpayers can save up to Rs 46,800 a year in taxes. It is presumed that if you’re in the 30% tax bracket, a deduction of ₹1,50,000 would save you 30% of ₹1,50,000 in taxes, which is ₹45,000. Add to this the 4% cess applicable, and the total savings could be around ₹46,800.The sovereign guarantees back the EPF investments, and hence, they are absolutely safe. Furthermore, the EPF investments earn a guaranteed rate of returns at 8.15% p.a.
• The other government offered investment options that give returns in the range of 5% to 8% while the EPF is currently providing interest at the rate of 8.65%, which is much higher than what PPF is offering. Also, the contributions are directly deducted from the salary and deposited to your EPF account. There is no need to maintain a separate account for the VPF investment.

How to invest in VPF?

Like mentioned earlier, there is no need to maintain a separate account to make VPF investments. Your VPF contributions are deposited into your EPF account. All you need to do is inform your employer that you are willing to make a higher EPF contribution. The HR or the payroll department will deduct the excess sum you are ready to invest as VPF. These accounts are transferable across all eligible employers. However, employees must contribute for five years towards the VPF to obtain tax benefits. 

Taxation of VPF proceeds

The VPF contributions too enjoy the same tax norms that EPF contributions do. The taxpayers can deduct up to Rs 1,50,000 a year by investing in VPF. The interest earned on VPF is tax-free and withdrawals made after a period of five years are also made tax-exempt. Partial or full withdrawals made within five years are taxable.

Conclusion

Investing in VPF is an excellent option for salaried employees. They don’t have to look for other tax-saving options as they can fully utilise their Section 80C limit with VPF itself, which offers much higher returns (guaranteed) than any other government-provided investment scheme.