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VPF (Voluntary Provident Fund) – Interest Rate, Features and Tax Benefits

by | Jun 19, 2024 | Income Tax | 0 comments

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Important Keyword: Dearness Allowance, EPF, EPFO Portal, VPF.

What is a VPF?

A Voluntary Provident Fund (VPF) is an additional contribution scheme designed for salaried employees to bolster their provident fund savings beyond the standard Employee Provident Fund (EPF) contribution. Often referred to as the Voluntary Retirement Fund Scheme, VPF functions as an extension of EPF, allowing employees to enhance their retirement corpus.

Employees opting for VPF can contribute beyond the mandated 12% of their basic salary towards EPF, extending up to 100% of their basic salary and Dearness Allowance (DA). The interest accrued on VPF contributions is credited to the employee’s EPF account at rates specified under the EPF scheme.

Once enrolled in VPF, participants commit to a minimum tenure of 5 years, during which contributions cannot be terminated or withdrawn prematurely. Notably, employers are not obliged to match employee contributions to VPF, distinguishing it from the mandatory EPF contributions where employer contributions are mandated.

VPF thus serves as a flexible savings avenue for employees seeking to augment their retirement funds, aligning with the structured framework of EPF while offering additional benefits through voluntary contributions.

The Voluntary Provident Fund (VPF) scheme offers salaried employees in India an avenue to enhance their retirement savings beyond the mandatory Employee Provident Fund (EPF) contributions. Here are the key features, workings, tax benefits, documents required, and withdrawal process related to VPF:

Features of Voluntary Provident Fund Scheme:

  1. Maximum Contribution: Employees can contribute up to 100% of their basic salary and Dearness Allowance (DA) to their VPF account.
  2. Eligibility: The scheme is available to salaried employees working in organizations recognized by the EPFO (Employee Provident Fund Organisation).
  3. Voluntary Enrollment: Participation in VPF is optional for employees; they can choose to enroll at any time during the financial year.
  4. Minimum Tenure: Contributions are locked in for a minimum of 5 years. Withdrawals before this period are generally not permitted except under specified circumstances.
  5. Interest Rates: Interest rates on VPF contributions are set by the government and are announced annually in the budget. For example, the current interest rate is 8.65% per annum.
  6. Tax Implications: Contributions made to VPF qualify for tax deductions under Section 80C of the Income Tax Act, up to a maximum of INR 1,50,000 per year. Additionally, interest earned is tax-exempt provided it does not exceed the specified limit.
  7. Withdrawal Options: Withdrawals from VPF can be made in part or in full. Early withdrawals (before 5 years) may incur tax liabilities on the interest earned. Withdrawals can be initiated using Form 31, either through the HR/accounting department or online via UAN (Universal Account Number) login.
  8. Beneficiaries: Upon resignation, retirement, or in the event of the employee’s death, the accumulated VPF amount is paid out to the employee or their nominee.

How Voluntary Provident Fund Works:

  • Initiation: Employees must request their employer in writing to deduct additional amounts towards VPF from their salary.
  • Documentation: Fill out a VPF form detailing personal information and contribution amounts.
  • Interest and Taxation: Interest earned beyond the specified rate is taxable if withdrawn prematurely.
  • Long-term Investment: VPF is structured for long-term financial goals, primarily retirement planning.

Documents Required for Voluntary Provident Fund Account:

  • Company registration certificate with the Ministry of Finance (MoF)
  • Completed Form 49 and Form 24
  • Detailed company profile
  • Memorandum and Articles of Association (if applicable)

Voluntary Provident Fund Withdrawal Process:

  • Use Form 31 to initiate withdrawals, submitting necessary documents such as bank details, PF number, and canceled cheque.
  • Withdrawals can be made for specified purposes like medical emergencies, education, or housing, subject to applicable rules and tax implications.

Benefits of Voluntary Provident Fund

The Voluntary Provident Fund (VPF) offers several significant benefits to salaried employees, making it a popular choice for enhancing retirement savings. Here are the key benefits of VPF:

  1. Tax Exemption: Contributions made to VPF are exempted from tax under Section 80C of the Income Tax Act, allowing employees to reduce their taxable income by the amount contributed.
  2. Tax-free Principal and Interest: Not only are contributions tax-exempt, but both the principal amount invested and the interest earned are also tax-free, provided the interest rate does not exceed the specified limit (currently 8.65%).
  3. High Contribution Limit: Employees can contribute up to 100% of their basic salary and dearness allowance towards their VPF account, enabling substantial savings over time.
  4. Pre-tax Investment: Contributions to VPF are deducted from the employee’s pre-tax income, reducing their taxable income at the source.
  5. Tax-free Returns: Returns on VPF investments remain tax-free as long as funds are not withdrawn prematurely, aligning with long-term investment goals such as retirement planning.
  6. Simplified Registration: The process to open a VPF account is straightforward, typically requiring completion of a registration form, making it accessible for employees seeking to bolster their retirement savings.
  7. Withdrawal Flexibility: Funds accumulated in VPF can be withdrawn upon resignation or retirement from the current employer, providing financial security during transitional phases.
  8. Portability: VPF accounts are easily transferable between employers, ensuring continuity of savings and simplifying financial management in case of job changes.
  9. Nominee Benefits: In the event of the account holder’s untimely death, the accumulated investment is transferred to the nominee or legal heir, ensuring continued financial support for dependents.

Comparison between VPF, PPF and EPF

Eligibility CriteriaEmployed Indian Any Indian citizenEmployed Indian
Contribution Up to 100%Minimum contribution INR 500 and the maximum amount is INR 1.5 Lakh12%
Taxability on MaturityNoneNoneNone
Maturity PeriodRetire/Resign15 YearsRetire/Resign
Tax BenefitsUp to INR 1 Lakh a yearUp to INR 1.5 Lakh a yearUp to INR 1 Lakh a year
Interest Applicable8.5% P.A.7.1% P.A.8.5% P.A.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/


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