Retirement planning in India often starts with the Employees’ Provident Fund (EPF), a mandatory savings tool for salaried employees. But what if you want to save more than the compulsory 12% and still enjoy government-backed security, stable returns, and tax advantages? That’s where the Voluntary Provident Fund (VPF) comes into play.
Think of VPF as an extension of your EPF — designed for individuals who want to grow their retirement corpus faster without taking stock market risks. With its guaranteed interest rate, strong compounding effect, and tax benefits, VPF is a suitable choice for cautious investors who prefer safety and predictability in wealth creation.
This guide covers everything about VPF — from rules and contribution flexibility to interest rates, taxation under Section 80C, and the impact of the ₹2.5 Lakh annual limit introduced by the government
What is VPF (Voluntary Provident Fund)?
The Voluntary Provident Fund (VPF) is an optional contribution scheme linked to your existing EPF account. Under EPF rules, employees are required to deposit 12% of their basic salary plus dearness allowance every month. With VPF, you can increase this contribution voluntarily, investing a higher percentage of your salary into the same provident fund account.
Since VPF contributions are credited to the EPF account itself, they earn the same government-declared interest rate and enjoy similar withdrawal rules and tax treatment. This makes VPF especially attractive for salaried individuals looking for safe, long-term savings beyond the standard EPF deduction.
Who Can Opt for VPF?
VPF is not open to everyone — it is specifically designed for salaried individuals already covered under the EPF scheme. Here’s what makes you eligible:
- Salaried employees only: If you receive a monthly salary and are already contributing towards EPF, you qualify.
- Active EPF account: You must have a valid UAN (Universal Account Number) linked with your EPF account.
- Voluntary in nature: Unlike EPF, there is no compulsion. The decision to invest in VPF rests entirely with the employee.
- Not for self-employed/NRIs: Business owners, freelancers, or NRIs are not allowed to participate in VPF.
In short, VPF is like a top-up savings option for employees who are already part of EPF.
How to Start a VPF Contribution
The process is fairly simple because VPF runs through your existing EPF account — no need for a separate account or passbook.
1: Inform your employer’s HR or payroll department about your intention to contribute.
2: Fill in a simple request or enrollment form mentioning the percentage of your salary you wish to allocate as VPF.
3: Once approved, the contribution starts getting deducted directly from your monthly salary.
Note: Usually, once you decide on a contribution percentage, you need to continue with it for the entire financial year. Changes are generally allowed only at the beginning of the next year
Documents and Process to Open a VPF Account
Opening a VPF account is a seamless and straightforward process, as it operates under your existing EPF account structure. No separate bank account opening, detailed KYC, or new passbook is required.
- Process: Submit a formal request or a designated VPF enrollment form (often managed via a payroll portal) to your company’s Human Resources (HR) or Payroll department.
- Documentation: This usually only requires filling out the contribution percentage on the form, along with your EPF UAN and signature. The VPF deduction then begins automatically from your next salary cycle.
Key Difference Between EPF and VPF
Understanding how EPF and VPF differ is important before you decide on your retirement strategy.
Feature | Employees’ Provident Fund (EPF) | Voluntary Provident Fund (VPF) |
Contribution | Mandatory – 12% of Basic + Dearness Allowance | Optional – Employee can choose an extra contribution |
Employer’s Role | Employer contributes an equal 12% (split between EPF & EPS) | No employer contribution, only the employee’s money |
Limit | Fixed at 12% of Basic + DA | Flexible – Up to 100% of Basic + DA |
Purpose | Build a compulsory retirement corpus | Boost retirement savings with higher contributions |
In short, EPF is compulsory, while VPF is voluntary. If you want to strengthen your retirement fund and enjoy the same interest rate, VPF acts as a natural extension of EPF
VPF Contribution Limit and Flexibility
One of the strongest advantages of VPF is the flexibility it gives employees in choosing how much to save.
Maximum VPF Contribution
There is no fixed lower limit for VPF, but you can invest up to 100% of your Basic Salary + Dearness Allowance.
- Example: Suppose your monthly Basic + DA is ₹80,000.
- EPF contribution (12%): ₹9,600
- You may choose to invest an additional amount (anywhere between ₹9,600 and ₹70,400) into VPF.
Key Points to Remember
- No employer match: Your company will not add anything to your VPF — their contribution remains fixed under EPF rules.
- Commitment for a year: Once you select a percentage, you normally have to continue it for the entire financial year. Changes are usually possible only at the start of a new year.
This flexibility makes VPF ideal for those who want to save more aggressively without entering risky investments like equities.
Current VPF Interest Rate
The interest on VPF is always the same as EPF, since both are managed by the Employees’ Provident Fund Organisation (EPFO). The rate is reviewed annually by the government and applied nationwide.
- For FY 2024-25, the interest rate is 8.25% per annum.
This rate is often higher than what most fixed deposits (FDs) or other small savings schemes provide, making VPF a strong debt instrument with assured returns.
In simple terms, VPF allows you to enjoy high, risk-free returns while your money compounds steadily over the years.
What are the Benefits of VPF?
VPF is popular because it offers the rare EEE (Exempt-Exempt-Exempt) tax status, along with stability and safety.
Here are its key benefits:
- High Security: Backed by the Government of India and managed by EPFO, VPF is one of the safest savings instruments available.
- Assured Returns: The interest rate is revised annually but has historically been higher than many bank deposits.
- Tax Efficiency: Contributions, accumulated interest, and maturity value are exempt from tax (subject to certain conditions).
- Partial Withdrawals Allowed: Though primarily a retirement savings tool, withdrawals are permitted for specific needs like education, marriage, housing, or medical emergencies.
- Easy to Manage: Since VPF is linked with your existing EPF account, no extra paperwork or new account is required.
In short, VPF offers the best of both worlds—safety like government-backed schemes and returns better than traditional savings accounts or FDs.
VPF Tax Benefits Under Section 80C
One of the main reasons salaried individuals prefer VPF is the tax advantage it provides.
- Contribution Deduction: Your VPF contribution, along with the mandatory EPF deduction, qualifies for a tax deduction under Section 80C of the Income Tax Act. However, the total deduction is capped at ₹1.5 Lakh per year.
- Tax-Free Maturity: If you have completed at least five continuous years of service, the entire VPF balance (your contributions + interest earned) is exempt from income tax at the time of withdrawal.
This makes VPF a powerful tool for those who want to save taxes today and build a completely tax-free retirement corpus tomorrow.
Is VPF Interest Taxable?
Until recently, VPF enjoyed full tax exemption. However, the rules changed in Budget 2021, and a new condition was introduced to prevent very high-income earners from making unlimited tax-free investments.
- The Rule: If your combined EPF + VPF contribution in a financial year crosses ₹2.5 Lakh, the interest earned on the extra amount will be taxable.
- Tax Treatment: That taxable portion of interest will be added to your income under “Income from Other Sources” and taxed at your applicable slab rate.
- Government Employees: They get a higher exemption limit of ₹5 Lakh, since the government does not contribute to their provident fund.
In other words, for moderate contributions, VPF remains completely tax-free, but once your yearly contribution goes beyond ₹2.5 Lakh, the tax efficiency reduces.
VPF Withdrawal Facility and Rules
Though VPF is designed to secure retirement, it does allow withdrawals under certain circumstances.
Full Withdrawal
You can withdraw the entire balance (your contributions + interest) in the following cases:
- Retirement or superannuation (generally at age 55).
- Resignation or termination from your job.
Partial Withdrawal
VPF permits partial access to funds in specific situations, such as:
- Housing: For purchase/construction of property or repayment of a home loan.
- Education: For higher studies of children.
- Marriage: For yourself, your children, or dependent siblings.
- Medical: For treatment of self or close family members.
Tax Implication on Early Withdrawal
If you withdraw your VPF balance before completing five years of continuous service, the tax exemption benefit (EEE status) is lost. In that case:
- The withdrawn amount, including interest, becomes taxable in that financial year.
- Any deductions claimed earlier under Section 80C will also be reversed.
In short, VPF gives you access to your money when really needed, but to enjoy full tax benefits, you should ideally keep it untouched for at least five years.
Key Difference: VPF vs. Other Investment Avenues
“VPF is often compared with other popular and tax-saving investments. This table helps to put VPF in a broader perspective:”
Scheme | Risk Profile | Lock-in/Tenure | 80C Deduction? | Tax on Interest? |
VPF | Low (Govt. Backed) | Until Retirement/Resignation | Yes (up to ₹1.5L) | Taxable above ₹2.5L contribution |
PPF (Public Provident Fund) | Low (Govt. Backed) | 15 Years | Yes (up to ₹1.5L) | Exempt (EEE) |
ELSS (Equity Linked Saving Scheme) | High (Equity) | 3 Years | Yes (up to ₹1.5L) | Taxable (LTCG above ₹1 Lakh) |
Tax Saver FD | Low (Bank Deposit) | 5 Years | Yes (up to ₹1.5L) | Taxable as per the slab |
Should You Invest in VPF?
The Voluntary Provident Fund (VPF) remains one of the best debt-based investment options available to salaried individuals. It offers a unique combination of high, government-guaranteed returns and strong compounding potential over the long term.
Highly Recommended For
- Individuals in the lower or mid-tax brackets who have exhausted the 12% mandatory EPF contribution and seek maximum capital safety.
- Risk-averse investors who prefer guaranteed returns over market-linked volatility.
Caution Recommended For
- High-Income Earners: If your total annual contribution (EPF + VPF) exceeds the ₹2.5 Lakh tax threshold, you must carefully analyse the returns. The interest earned on the excess amount is taxable at your marginal tax rate, which significantly reduces the scheme’s overall tax efficiency compared to alternatives like PPF or tax-efficient debt mutual funds.
VPF is an excellent tool for securing your retirement, provided you plan your contribution amount strategically, taking into account the new tax rules.
Frequently Asked Questions (FAQs on VPF)
Q1. Can I stop my VPF contribution in the middle of the year?
Generally, no. VPF contributions are treated like a year-long commitment. You are required to maintain your chosen contribution rate for at least one full financial year. Requests to change or discontinue your VPF contribution must typically be submitted to your employer at the beginning of the next financial year.
Q2. Does the employer contribute to my VPF account?
No. The employer is only legally required to contribute the mandatory 12% to the EPF (Employees’ Provident Fund) and the Employee Pension Scheme (EPS). The VPF scheme is purely voluntary and is contributed to solely by the employee.
Q3. What is the lock-in period for VPF?
The VPF tenure is technically until your retirement or resignation. However, for the accumulated corpus and interest to remain fully tax-free (EEE status), you must have completed a minimum of five years of continuous service. Withdrawal before this period makes the accumulated interest and contributions taxable.
Q4. Can I transfer my VPF account when I change jobs?
Yes. Since VPF is seamlessly integrated with your EPF account, it can be easily transferred from your old employer to the new one using your UAN (Universal Account Number). This is a key advantage that ensures the continuity of your service period for tax exemption purposes.
Q5. Is the VPF interest rate fixed forever?
No. While the principal and interest are guaranteed by the government, the VPF interest rate is not fixed forever. It is reviewed and declared annually by the EPFO (Employees’ Provident Fund Organisation), typically mirroring the EPF rate.