The voluntary provident fund (VPF) allows salaried individuals to save money for retirement. This saving option is in addition to the employees’ provident fund (EPF), permitted only after the 12 per cent standard contribution from the basic salary. While EPF has a 12 per cent cap, VPF has no limit. Individuals can contribute 100 per cent of their basic salary to VPF. However, unlike EPF, where the employer contributes an equal amount to the fund, the employer has no obligation to VPF. Typically, employees contribute to VPF to save tax and earn higher, tax-free returns. However, the VPF scheme has certain conditions regarding tax benefits.

 Also Read: PPF Vs NPS: Which Is A Better Retirement Savings Option For You?

Is VPF Contribution Taxable?

 As per the income tax rule, VPF contributions fall under the exempt-exempt-exempt (EEE) category. However, there are certain nuances. Let us delve into them.

Tax Exemption On Investment: 

 VPF is eligible for tax benefits under Section 80C up to Rs 1.5 lakh in a financial year. While the contribution could be higher, tax exemption is available only up to this limit, and any amount beyond that is taxable.

Tax Exemption On Interest: 

 In the Union budget 2021, the combined investment limit for EPF and VPF was set at Rs 2.5 lakh for tax exemptions on interest, exceeding which will attract tax. For example, if an employee contributes Rs 1 lakh in EPF and Rs 2 lakh in VPF, the interest earned on the excess Rs 50,000 (Rs 3,00,000—Rs 2,50,000) will be taxable.

Tax Exemption On Maturity: 

 The maturity proceeds from VPF are tax-free, just like EPF. However, the point to note is the time of withdrawal. While EPF can be withdrawn at retirement or if unemployed for two months, VPF can be withdrawn after five years or if unemployed. The withdrawal amount from VPF is tax-exempt only when withdrawn after five years, but if withdrawn within five years, it becomes taxable.

The government determines the interest rates for provident funds annually. For FY2023-24, EPF and VPF interest rate is 8.25 per cent, which is 10 basis points higher than 8.15 per cent in the previous financial year. In FY2013-14, the EPF interest rate was 8.75 per cent.

 Also Read: How To Update KYC For Your Employees’ Provident Fund? 

Is VPF Contribution Useful To Build A Retirement Corpus?

Employees who have not exhausted the section 80C limit can utilise VPF to save tax for the EEE benefit. VPF interest is the same as EPF and is typically higher than other fixed deposits. VPF can boost savings for retirement while offering flexibility to withdraw money for emergencies. However, its tax benefits are available only in the old tax regime, so potential contributors should evaluate their requirements and goals to decide whether it is helpful for them or not.