What is a Voluntary Provident Fund? A Detailed Overview
- Rajesh Kumar Kar
- Sep 9
- 8 min read
Building a retirement fund while you have a steady salary and investing it in areas that yield a high rate of return is always a good idea. Investors with varying risk tolerances can choose from a wide variety of these possibilities. Among these, the Provident Fund (PF) is one of the most notable savings plans, supported by a national guarantee. There are two types of provident funds in India: mandatory and optional. In contrast to the Voluntary Provident Fund, which is an optional PF, the Employees' Provident Fund is a compulsory benefit.
Table of Contents
What is a Voluntary Provident Fund?
Employees have the option to enhance their Provident Fund (PF) accounts by making contributions to the Voluntary Provident Fund (VPF), commonly known as the Voluntary Retirement Fund. This contribution is in addition to the standard 12% that employees typically contribute to their EPF. You can make a contribution of up to 100% of your Dearness Allowance and Basic Salary, and the interest rate remains the same as that applicable to the EPF. Employers are not required to make contributions to their workers' VPF accounts. Similarly, an employee is not required to make contributions to the VPF. After you choose a VPF contribution, you can't cancel it until the five-year base period wraps up.
Benefits of Voluntary Provident Fund
The VPF is a great way to save money on taxes because it gets classified as an EEE (exempt from contributions, exempt from principal, and exempt from interest). Moreover, it supports the worker in reaching key life milestones while also helping them build a robust savings portfolio. However, the EEE exemption category now has restrictions as a result of Budget 2021. The tax exemption on accrued interest would be available up to a donation of Rs. 2,50,000 starting in FY 2021–2022. TDS gets deducted from the excess contribution amount, and the interest will be taxable. Additional advantages are
A secure investment option: With a fixed interest rate and support from the Indian government, this plan is a secure investment. As a result, it’s considered a safer option compared to the long-term investments that private investors usually make.
Opening a VPF account is an easy process: All an employee needs to do is reach out to their HR or Finance team and tell them to submit a request for an extra contribution to the VPF using a registration form. The current EPF account becomes the additional VPF account.
Excellent returns: With this plan, you’ll see interest piling up. Plus, long-term gains get a boost since you can deduct donations of up to Rs 1.5 lakhs annually under Section 80C. Also, up to Rs 2.5 lakhs in contributions are tax-free in terms of interest.
Simple transfer: If you change jobs, you can move your account from one employer to another without any hassle.
Eligibility Criteria for Voluntary Provident Fund
A Voluntary Provident Fund is available to people in the organized sector of the economy. Furthermore, only companies with more than 20 employees are required to participate in EPF. To establish a Voluntary Provident Fund, you need to be part of a company that has received recognition from the EPF. Employers with fewer than 20 workers may also decide to provide their staff members with an EPF account. That, however, is up to the employer rather than the worker. Employees may only establish a VPF if their company decides to set up EPF accounts for them.
VPF Interest Rate
The Government takes care of setting the interest rate for the VPF, which is adjusted every year. For the financial year 2025-26, the interest rate for the Voluntary Provident Fund (VPF) is 8.25% per annum. As the Voluntary Provident Fund is a component of the Employees’ Provident Fund (EPF), it receives interest at the same rate as the EPF. The Employees’ Provident Fund Organisation, responsible for managing EPF regulations, evaluates the interest rate at the close of each financial year in consultation with the Finance Ministry.
How to Open a Voluntary Provident Fund
To begin the process, your first step is to write a request to your employer or the HR team. In your request, be sure to ask for an extra deduction from your salary for the VPF. Also, include your personal information and the amount you’d like to contribute each month from your basic salary. You can set up a VPF account at any time throughout the financial year. Just keep in mind that once you start investing in the VPF, you can’t stop that investment until the year is over. If you decide to withdraw your VPF funds within five years of opening the account, be aware that the amount will be subject to taxes.
Tax Benefits of Voluntary Provident Fund
VPF is among the most beneficial choices for tax savings in India. Under Section 80C, employees can benefit from tax deductions of up to Rs. 1.5 lakh for their VPF contributions. Additionally, the VPF interest is tax-exempt, provided your contributions are below the recommended Rs. 2,50,000 cap. And here's the best part: when you withdraw your VPF funds after five years, the maturity proceeds are completely tax-exempt.
Tax Exemption for VPF
The VPF, which stands for Voluntary Provident Fund, falls into the EEE (Exempt Exempt Exempt) category. It means that both your contributions and the interest earned, as well as the principal amount at maturity, are tax-free. However, keep in mind that if you decide to withdraw your VPF funds within five years of making your investment, you will have to pay taxes on that amount. You can only enjoy tax-free withdrawals if you wait until after the five-year mark.
VPF Contribution Limit
You can contribute as much as you like to your VPF each year. There's no upper or lower limit. You could even contribute the full amount of your monthly income, including your salary and dearness allowance. Just remember, your employer doesn’t have to contribute to your VPF. Once you set up your VPF account, though, you’re in it for the long haul; it can't be closed for five years, and you can't stop your contributions before that five-year mark.
VPF Maturity Period
A Voluntary Provident Fund must have a minimum lock-in term of five years. Additionally, because a VPF gets managed through an EPF account, a person may take this sum upon retirement, after being unemployed for more than two months, or to cover the following costs:
Loan repayment
Building or acquiring residential real estate
A child’s education
Self-marriage or a dependent spouse
For medical reasons
To receive all of the VPF tax benefits, however, you must be at least five years old. An individual may forfeit exemptions if they decide to leave before the five-year lock-in period.
VPF Lock-In Period
A VPF account's lock-in period is five years. An employee's EPF withdrawals made before the five-year mark will be subject to taxation and treated as salary income, with TDS u/s 192A deducted from the transaction.
VPF Withdrawal Rules
The fund offers the option for partial withdrawals as loans, and you can also make complete withdrawals if needed. However, taxes on the cumulative maturity amount would be due if you choose to withdraw before the five-year required tenure. Employees who retire or resign will get the full maturity amount. In the unfortunate case of the account holder's sudden death, the nominee gains access to the accumulated funds in the VPF account. The VPF fund is favorable since you can get money whenever you need to. One's VPF account is always a backup in the event of an unanticipated financial crisis. Several factors make valid reasons for withdrawal. These are:
For family members' or employees' medical emergencies
For the employee's marriage or further education
For constructing a house or obtaining a new property
For children's educational costs
Steps to Check VPF Balance
Step 1: Go to the official EPFO website.
Step 2: Click on the 'For Employees' option found under the 'Our Services' tab.
Step 3: Under the 'Services' header, select the 'Member Passbook' option.
Step 4: Upon entering the password and UAN, select 'Login'.
Step 5: After selecting the Member ID, the next step is to press ‘View Passbook'.
Step 6: You can find your VPF account information in the EPF passbook.
A Comparison Between EPF, VPF, and NPS
Particulars
| VPF
| EPF
| NPS
|
Eligibility | Any salaried individual with EPF account | Any salaried individual | All citizens of India (resident or non-resident) between 18-60 years |
Rate of Interest | 8.15% | 8.15% | 9%-12% (Market linked) |
Contribution by employer | Nil | 12% of basic salary + DA | Optional for private companies |
Employee contribution | Up to 100% of basic salary + DA | 12% of basic salary + DA | 10% of basic salary + DA |
Period of investment | Earlier of:Five yearsUnemployment | Till retirement or unemployment | Till retirement |
Tax benefits | Deduction on contributions up to Rs.1.5 lakh U/S 80C | Deduction on contributions up to Rs.1.5 lakh U/S 80C | Deduction up to Rs.1.5 lakh U/S 80CCE, Rs. 50,000 U/S 80CCD(1) and 80CCD(2) with a threshold of Rs 7.5 lakhs. |
Partial withdrawal | Permissible for specified purposes | Permissible for specified purposes | Permissible for specified purposes after three years of investment |
Conclusion
VPF is a smart, low-risk investment option that’s ideal for salaried individuals who want to grow their savings over time while managing risks and tax obligations. It’s particularly beneficial for those nearing retirement, as it provides fixed interest earnings and reliable returns during those golden years. To create a well-rounded retirement portfolio, you can use a VPF calculator to estimate your returns and adjust your investments as needed.
FAQs
Q1. Does VPF come under Section 80C?
Yes, by contributing to the VPF, you can benefit from tax deductions of up to Rs. 1.5 lakh under Section 80C.
Q2. What is the maximum VPF contribution?
When it comes to the Voluntary Provident Fund (VPF), there’s no cap on how much you can contribute. In addition to the DA, up to 100% of their basic salary can be contributed by an employee.
Q3. What is the current interest rate on VPF?
VPF interest rate for the current financial year is fixed at 8.25%.
Q4. Is VPF eligible for tax benefits?
Absolutely! The EEE tax category comprises the Voluntary Provident Fund (VPF). It means that contributions, interest earned, and maturity proceeds from the VPF are all tax-exempt. However, consider that if you withdraw any amount from your VPF within five years of investing, it will be subject to tax. From the FY 2021-22 onwards, the interest on contributions below Rs 2.5 lakhs was tax-exempt.
Q5. Who can open VPF?
The VPF scheme is applicable only to salaried employees who already have an EPF account and receive their salaries every month.
Q6. Is VPF better than PPF?
VPF has some clear advantages over the Public Provident Fund (PPF). For one, the interest rate on VPF is generally more favourable. Another significant advantage is that you can withdraw your entire VPF balance after five years, whereas PPF has a lengthy lock-in period of 15 years. PPF is ideal for those with long-term goals, like saving for a child's education or a wedding. While PPF has a contribution limit, VPF allows you to contribute without any threshold.
Q7. Will my VPF account get affected if I change jobs?
The VPF account links directly to your UAN or Aadhar Card, so switching your account from one employer to another using your UAN is straightforward.
Q8. How much money can be withdrawn as a loan from a VPF account?
You can make partial or whole withdrawals from a VPF account. If someone changes jobs, they often decide to close their voluntary PF accounts and access their money. However, be aware that if you take this step before your account has been active for 5 years, the funds you’ve accumulated may be taxed.
Q9. Can I withdraw from my VPF before retirement?
Yes, loans and partial withdrawals are allowed. However, if you withdraw before the required 5-year period, there will be tax repercussions.
Q10. Can self-employed individuals opt for VPF?
No, only salaried employees who receive their monthly pay through salary accounts are eligible for VPF.
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