Voluntary Provident Fund (VPF)

The Voluntary Provident Fund is a retirement savings scheme in which salaried employees can voluntarily contribute an additional amount over and above their mandatory Employee Provident Fund (EPF) contribution. Employees can contribute up to 100% of their basic salary and dearness allowance to the VPF. The scheme is governed by the same rules as the EPF and is backed by the Government of India. Interest earned on VPF contributions is the same as that offered on EPF, revised annually by the government. VPF is popular due to its tax benefits and risk-free returns, making it a preferred long-term investment option for salaried individuals.

EPF Voluntary Contribution

EPF voluntary contribution refers to the employee’s decision to contribute more than the statutory 12% of their basic salary and dearness allowance towards the Provident Fund. While the mandatory EPF requires a 12% contribution from both employee and employer, the employee can choose to voluntarily contribute a higher percentage through the VPF route. However, the employer is not obligated to match this excess contribution. These voluntary contributions are deposited in the same EPF account and earn interest at the prevailing EPF rate. This option is generally exercised by employees who wish to increase their retirement savings in a tax-efficient and safe manner.

Voluntary PF (Voluntary Provident Fund)

The term Voluntary PF is another name for the Voluntary Provident Fund (VPF). It signifies the additional, non-compulsory contributions made by an employee into the EPF account. The contributions under Voluntary PF are purely optional and are not mandated by law. Employees opt for this route to maximize their long-term savings, take advantage of tax exemptions under Section 80C of the Income Tax Act, and benefit from the fixed interest rates set by the government. Voluntary PF contributions are locked in for five years to retain tax-exempt status on both interest and maturity.

Eligibility for VPF

Only salaried individuals who receive a monthly income through a salary account and are already contributing to the EPF are eligible to make VPF contributions. The facility is not available to self-employed individuals or professionals who do not fall under the EPF framework. The option to contribute to VPF must be initiated through the employer or human resource department.

VPF Account

A VPF account is not separate from the EPF account. Contributions made under the VPF are deposited in the same EPF account. Once opted in, the VPF contributions are automatically deducted from the employee’s salary every month. The account is managed by the Employees’ Provident Fund Organisation (EPFO), and all transactions can be tracked online using the Universal Account Number (UAN).

Interest on VPF

The interest on VPF contributions is determined annually by the government and is credited to the account at the end of the financial year. For the financial year 2023–24, the interest rate is 8.25% per annum. The interest is compounded yearly and added to the principal amount.

Tax Benefits of VPF

Voluntary Provident Fund enjoys triple tax exemption, classified under the EEE (Exempt-Exempt-Exempt) category. Contributions qualify for tax deduction under Section 80C up to Rs. 1.5 lakh annually. Interest earned on contributions up to Rs. 2.5 lakh is exempt from tax. The maturity amount is also tax-free if withdrawn after a continuous investment of five years. If contributions exceed Rs. 2.5 lakh in a year, interest on the excess is taxable, and TDS will apply.

VPF Lock-in Period

The lock-in period for VPF contributions is five years. Withdrawing the accumulated amount before completing five years makes the entire amount—including the interest—taxable. Employees should consider this lock-in before opting for voluntary contributions.

VPF Withdrawal Rules

Employees can withdraw from their VPF account after resigning, retiring, or in certain emergency situations. Partial withdrawals are permitted for specific needs such as medical emergencies, marriage or higher education of children, or purchasing or constructing a house. Early withdrawals before five years lead to loss of tax exemptions and may attract TDS under Section 192A.

Contribution Limits

There is no maximum statutory limit on VPF contributions except that they cannot exceed 100% of the employee’s basic salary and dearness allowance. The minimum contribution is also not prescribed. However, employees must commit to the contribution for at least one financial year. Contributions cannot be altered or stopped mid-year unless under extraordinary circumstances.

Employer’s Role in VPF

The employer facilitates the deduction and deposit of the voluntary contributions but is not required to match the amount. Their role is limited to processing the request and ensuring regular deposit to the employee’s EPF account.

How to Open a VPF Contribution

To start contributing to VPF, the employee must submit a written request to the employer or HR department. The contribution amount is then deducted from monthly salary, and no separate account is needed. Once started, the contribution continues until the end of the financial year unless otherwise specified.

VPF vs EPF

VPF is a voluntary extension of the EPF. While both earn the same rate of interest and offer similar tax benefits, EPF has a mandatory contribution limit and employer participation, whereas VPF is completely optional and does not require any contribution from the employer.