Voluntary Provident Fund:
Definition, Benefits & Comparison

A Voluntary Provident Fund (VPF) is a non-compulsory retirement savings scheme that allows salaried employees to contribute more than the mandatory 12% of their basic salary and dearness allowance toward their Employee Provident Fund (EPF) account. It is an extension of the EPF scheme managed by the Employees' Provident Fund Organisation (EPFO) and backed by the Government of India.

Under the VPF scheme, employees can voluntarily contribute up to 100% of their basic salary and dearness allowance. The interest rate earned on VPF contributions is the same as the EPF rate, which is currently 8.25% per annum for FY 2024-25. Employers are not obligated to contribute to the VPF account, making it purely an employee-driven savings option.

The VPF scheme is available only to salaried individuals who already have an EPF account and receive monthly payments through a recognized salary account. Once contributions are started, they cannot be discontinued or terminated before the base tenure of 5 years is completed.

Related terms: Employee Provident Fund (EPF), Public Provident Fund (PPF), dearness allowance, EPFO

VPF provides 7 key benefits for salaried employees:

• Tax savings: Contributions qualify for deduction under Section 80C of the Income Tax Act, 1961, up to Rs. 1.5 lakh per year
• Safe investment option: The scheme is managed by the Government of India with fixed interest accrual, making it a risk-free investment compared to long-term investments offered by private players
• High and stable returns: Currently offers 8.25% p.a. interest, which is higher than Public Provident Fund (7.1%) and most fixed deposits
• Easy to apply: No separate account needed; the existing EPF account serves as the VPF account
• Easy transfer: The VPF account can be transferred from one employer to another upon changing jobs using the Universal Account Number (UAN)
• Loan and partial withdrawal facility: Allows partial withdrawals or loans for medical emergencies, higher education, house purchase, or marriage expenses
• Disciplined savings: Auto-deduction from salary builds solid savings habits without manual intervention

The VPF falls under the EEE category (Exempt-Exempt-Exempt), meaning contributions, interest, and maturity proceeds are tax-exempt. However, from FY 2021-22 onwards, tax exemption on accrued interest applies only up to Rs. 2,50,000 in annual contribution. Interest on excess contribution becomes taxable, and TDS will be deducted on such amounts.

The VPF interest rate for FY 2024-25 is 8.25% per annum. This rate is the same as the EPF interest rate and is revised annually by the Government of India through the Employees' Provident Fund Organisation (EPFO).

The interest on VPF is credited to the member's account on monthly running balances at the end of each financial year. Interest is calculated on the credit amount on the last day of the preceding year, less any sums withdrawn during the current year. For sums withdrawn during the year, interest is credited from the beginning of the current year up to the last day of the month preceding the month of withdrawal.

Interest rates on VPF have historically been competitive compared to other fixed-income investments. For FY 2023-24, the rate was 8.15%, and for FY 2021-23, it was 8.10%. These rates are typically higher than Public Provident Fund (PPF), which offers 7.1%, and most bank fixed deposits.

VPF is available only to salaried individuals who meet 3 specific criteria:

• Must be employed in an organization duly recognized by the Employees' Provident Fund Organisation of India
• Must already have an active EPF account with mandatory 12% contribution from basic salary and dearness allowance
• Must receive monthly salary payments through a specific salary account

Self-employed individuals and those working in the unorganized sector cannot opt for VPF. The scheme is designed specifically as an extension of EPF for the salaried class who want to boost their retirement savings beyond the mandatory contribution.

VPF is ideally suited for salaried individuals looking to invest in long-term financial products, reduce tax liability, and build a robust retirement corpus. It is particularly beneficial for those approaching retirement who need a safe pension fund option with guaranteed returns.

Opening a VPF account follows 5 simple steps:

1. Submit a written request to your employer or HR department asking for additional deduction from salary for VPF
2. Fill out the VPF application form provided by your employer, specifying the percentage or amount you want to contribute monthly from your basic salary and dearness allowance
3. Provide personal information including your name, postal address, EPF account number, and bank details
4. Submit the completed form along with required documents to your HR or finance team
5. Your employer will begin deducting the specified VPF amount from your monthly salary and credit it to your EPF account

A VPF account can be opened at any time during the financial year. However, employers usually encourage employees to start at the beginning of the financial year for better tax forecasting and financial planning. No separate account is created for VPF; it is linked to your existing EPF account using your UAN (Universal Account Number) or Aadhaar Card.

Once you start VPF contributions, you cannot discontinue them before completing 5 years. If you withdraw the VPF amount within 5 years of opening the account, the accumulated amount will be taxable.

There is no maximum contribution limit per year for VPF. An individual can contribute up to 100% of their monthly income (basic salary plus dearness allowance) toward VPF. This flexibility allows employees to significantly boost their retirement savings based on their financial capacity.

While there is no upper cap on contributions, tax implications apply to contributions exceeding Rs. 2.5 lakhs per annum. For contributions up to Rs. 2.5 lakhs annually, the interest earned is completely tax-exempt. However, interest on contributions exceeding this threshold becomes taxable from FY 2021-22 onwards, and TDS will be deducted on such amounts.

Contributions to VPF qualify for tax deduction under Section 80C of the Income Tax Act, subject to the maximum cap of Rs. 1.5 lakh per year. The employer is not obligated to contribute to the VPF account, and once opened, the account cannot be closed for 5 years.

VPF withdrawal follows specific rules based on timing and purpose:

• Lock-in period: The VPF account has a lock-in period of 5 years from the date of opening
• Tax-free withdrawal: Withdrawals made after completing 5 years of investment are completely tax-exempt
• Early withdrawal tax: If withdrawn before 5 years, the amount is taxable as income from salary, and TDS under Section 192A will be deducted
• Partial withdrawals: Allowed for specified purposes including medical emergencies, higher education, house purchase or construction, home loan repayment, and marriage expenses
• Complete withdrawal: Permitted at the time of resignation or retirement from employment
• Transfer option: The account can be transferred from one employer to another using the UAN
• Nominee withdrawal: In case of untimely death of the account holder, the nominee can claim the accumulated funds

To withdraw funds, an employee must submit Form-31 along with a request letter to their employer. Required documents include personal details, postal address, EPF account number, bank details where the maturity proceeds should be credited, and a cancelled cheque. These documents must be attested by the employer before processing.

Employees can check their VPF balance online through the EPFO portal by following 6 steps:

1. Visit the official website of EPFO
2. Under the 'Our Services' tab, click the 'For Employees' option
3. Click the 'Member Passbook' option under the 'Services' heading
4. Enter your UAN (Universal Account Number) and password
5. Click the 'Login' button
6. Select your Member ID and click the 'View Passbook' option to see your VPF account details

The EPF passbook will contain complete details of your VPF account, including contributions, interest earned, and current balance. You can also check your balance through the UMANG app or by reviewing your monthly salary slip provided by your employer.

VPF falls under the EEE (Exempt-Exempt-Exempt) tax category, meaning it receives favorable tax treatment at 3 stages:

• Contribution stage: Contributions qualify for tax deduction under Section 80C up to Rs. 1.5 lakh per year
• Interest stage: Interest earned on contributions up to Rs. 2.5 lakhs per annum is completely tax-exempt
• Withdrawal stage: Maturity proceeds are tax-free if withdrawn after 5 years of investment

However, Budget 2021 placed limitations on the EEE exemption category. From FY 2021-22 onwards, interest accrued on contributions exceeding Rs. 2.5 lakhs per year becomes taxable, and TDS will be deducted on such amounts. If the VPF amount is withdrawn within 5 years of investing, the entire withdrawal amount becomes liable for tax as income from salary.

This tax-efficient structure makes VPF one of the best options in India to save tax while building a retirement corpus with guaranteed returns.

VPF is often compared to 3 related retirement savings schemes:

VPF vs. EPF

EPF is mandatory for all salaried employees with both employee and employer contributing 12% of basic salary plus dearness allowance. VPF is voluntary, allowing employees to contribute up to 100% of basic salary and dearness allowance without any employer contribution. Both schemes offer the same interest rate (8.25% for FY 2024-25) and similar tax benefits under Section 80C. The period of investment for both extends until retirement or unemployment, whichever is earlier.

VPF vs. PPF

VPF offers a higher interest rate (8.25%) compared to PPF (7.1% for FY 2023-24). VPF has a shorter lock-in period of 5 years versus PPF's 15-year tenure. The entire VPF amount can be withdrawn after 5 years, while PPF requires the full 15-year commitment. PPF has a contribution limit of Rs. 1.5 lakhs per annum, whereas VPF has no such limit. PPF is more suited for individuals looking to invest for long-term goals like a child's marriage or education, while VPF is ideal for salaried employees seeking to maximize retirement savings.

VPF vs. NPS

NPS is open to all Indian citizens between 18-60 years, while VPF is restricted to salaried individuals with an EPF account. NPS offers market-linked returns ranging from 9-12%, whereas VPF provides fixed returns of 8.25%. NPS requires a minimum employee contribution of 10% of basic salary plus dearness allowance, while VPF allows voluntary contributions up to 100%. NPS offers additional tax deduction of Rs. 50,000 under Section 80CCD(1B), while VPF is limited to Section 80C benefits. NPS allows partial withdrawal after 3 years, while VPF permits partial withdrawals for specified purposes throughout the investment period.