Voluntary Provident Fund (VPF): Interest Rate, Benefits, Tax Exemption, Limit, Withdrawal Rules

The VPF or Voluntary Provident Fund is a non-compulsory investment made by salaried employees over and above the EPF i.e. Employees Provident Fund. The major advantage is that it is a government-backed savings scheme with low risks and high returns. The VPF, full form is Voluntary Provident Fund. Learn more about VPF in this article. 

What is Voluntary Provident Fund?

Voluntary Provident Fund (VPF) aka Voluntary Retirement Fund is a voluntary fund contribution from the employee towards his Provident Fund (PF) account. This contribution is beyond the 12% of contribution by an employee towards his EPF. The maximum contribution is up to 100% of Basic Salary and Dearness Allowance. Interest is earned at the same rate as the EPF.

Employers are under no obligation to contribute to their employees’ VPF portfolio. Likewise, an employee is also under no obligation to contribute to the VPF. Once the contribution is chosen in VPF, the same cannot be terminated or discontinued before the base tenure of 5 years is completed. 

Who can invest in Voluntary Provident Fund?

A VPF is an extension of the EPF. The VPF option is available only to salaried individuals who receive their monthly payments through a specific salary account.

Benefits of Voluntary Provident Fund

The VPF falls under the EEE category ( EEE – exempt on contribution; exempt from the principal; exempt on interest) making it an excellent tax saving option. It also helps the employee amass a sizeable savings portfolio and help him/her during big life milestones.

However, Budget 2021 has placed limitations on the EEE exemption category. From FY 2021-22 onwards, tax exemption on accrued interest will be applicable only up to Rs 250,000 contribution. Interest on excess contribution will be taxable, and TDS will be deduction on such amount.

Other benefits are

• Safe Investment Option:
  The scheme is managed by the Government of India and has a fixed interest accrual. Hence, it is considered as a risk-free investment compared to the long-term investments offered by other private players.
• Easy to Apply:
  To open a VPF account, an employee must approach his HR/Finance team and advise them to raise a request for an additional contribution to the VPF through a registration form. The existing EPF account will serve as the additional VPF account.
• High returns:
  Currently, interest is accrued at 8.15% per annum under this scheme. Contributions up to 1.5 lakhs p.a. can be claimed as a deduction under Section 80C, and interest accrued on contributions up to Rs 2.5 lakhs is exempt from tax, resulting in higher returns in long-term.
• Easy transfer:
  The account can be transferred from one employer to another upon changing jobs.

What is Voluntary Provident Fund?

Voluntary Provident Fund (VPF) aka Voluntary Retirement Fund is a voluntary fund contribution from the employee towards his Provident Fund (PF) account. This contribution is beyond the 12% of contribution by an employee towards his EPF. The maximum contribution is up to 100% of Basic Salary and Dearness Allowance. Interest is earned at the same rate as the EPF.

Employers are under no obligation to contribute to their employees’ VPF portfolio. Likewise, an employee is also under no obligation to contribute to the VPF. Once the contribution is chosen in VPF, the same cannot be terminated or discontinued before the base tenure of 5 years is completed. 

Who can invest in Voluntary Provident Fund?

A VPF is an extension of the EPF. The VPF option is available only to salaried individuals who receive their monthly payments through a specific salary account.

Benefits of Voluntary Provident Fund

The VPF falls under the EEE category ( EEE – exempt on contribution; exempt from the principal; exempt on interest) making it an excellent tax saving option. It also helps the employee amass a sizeable savings portfolio and help him/her during big life milestones.

However, Budget 2021 has placed limitations on the EEE exemption category. From FY 2021-22 onwards, tax exemption on accrued interest will be applicable only up to Rs 250,000 contribution. Interest on excess contribution will be taxable, and TDS will be deduction on such amount.

Other benefits are

• Safe Investment Option:
  The scheme is managed by the Government of India and has a fixed interest accrual. Hence, it is considered as a risk-free investment compared to the long-term investments offered by other private players.
• Easy to Apply:
  To open a VPF account, an employee must approach his HR/Finance team and advise them to raise a request for an additional contribution to the VPF through a registration form. The existing EPF account will serve as the additional VPF account.
• High returns:
  Currently, interest is accrued at 8.15% per annum under this scheme. Contributions up to 1.5 lakhs p.a. can be claimed as a deduction under Section 80C, and interest accrued on contributions up to Rs 2.5 lakhs is exempt from tax, resulting in higher returns in long-term.
• Easy transfer:
  The account can be transferred from one employer to another upon changing jobs.

How to Open a VPF Account?

An employee must ask his/her employer or the HR department in writing to open a VPF account and deduct an additional amount from salary for VPF. The employee must provide personal information and the amount to be contributed monthly from the basic salary towards the VPF account. 

A VPF account can be opened at any time during the financial year. Please note that an employee cannot discontinue the investment under VPF during the financial year. In case the employee withdraws the VPF amount within five years of opening the account, the amount will be taxable.

VPF Interest Rate 

The Indian government sets the VPF interest rate, which is revised yearly. The VPF interest rate for 2023-24 is 8.15% p.a.

VPF Tax Benefits

VPF is one of the best options in India to save tax. Under Section 80C of the Income Tax Act, 1961, employees can claim tax benefits of up to Rs.1.5 lakh on VPF contributions. The interest on VPF is also exempt from tax subject to the threshold limit of Rs 2,50,000 in contribution. The maturity proceeds of VPF are tax-exempt when withdrawn after five years of opening the VPF account.

VPF Tax Exemption

The VPF falls under the EEE (Exempt Exempt Exempt) category. Thus, the VPF contribution, interest and principal/maturity amount are tax-free. However, if the VPF amount is withdrawn within five years of investing, they will be liable to tax. The withdrawal amount is tax-free only when it is withdrawn after five years of investment.

VPF Contribution Limit

There is no maximum or minimum VPF contribution limit per year. An individual can also contribute 100% of his/her monthly income (salary + dearness allowance) towards VPF. The employer is not obligated to contribute to the VPF account. Also, once the VPF account is opened, it cannot be closed for five years. The contributions cannot be discontinued before five years of account opening.

VPF Withdrawal Rules

The fund allows partial withdrawals as loans with also the possibility of complete withdrawals. If the withdrawal happens before the 5-year minimum tenure, then tax will be applicable on the accumulated maturity amount. Once the employee resigns or retires from the employment, the final maturity amount is paid to him. At the time of the untimely death of the account holder, the nominee can get possession of the accumulated funds in the VPF account. 

The VPF fund is mainly popular as the accumulated money can be withdrawn at any given time. In case of an unforeseen financial emergency, one can always fall back to his VPF account. The account can be broken for many reasons, which includes :

• For medical emergencies of the employee or family
• For marriage or higher education of the employee
• For buying a new land/house or construction of the house
• For education expenses of children

VPF Lock-in Period

The lock-in period of a VPF account is five years. If an employee withdraws an amount from EPF before five years, it will be liable to tax, and such amount will be taxable as income from salary, TDS u/s 192A will also be deducted on such transaction.

How to Check the VPF Balance?

Employees can check the VPF balance online by following the below process: 

• Visit the official website of EPFO.
• Under the 'Our Services' tab, click the 'For Employees' option. 
• Click the 'Member Passbook' option under the 'Services' heading. 
• Enter the UAN and password and click the 'Login' button.

• Select the Member ID and click the 'View Passbook' option.

• The EPF passbook will contain the details of your VPF account. 

EPF vs VPF vs NPS