Synopsis: Voluntary Provident Fund (VPF) allows salaried employees to make additional contributions to their EPF account and earn EPF-linked interest. This article explains VPF taxation rules, including Section 80C benefits, interest taxation limits, withdrawal rules, and TDS provisions.
Voluntary Provident Fund (VPF) is an extended form of the Employees’ Provident Fund (EPF), where employees have the freedom to deposit extra amounts other than the EPF deposits which are mandated as 12% of the basic salary and DA. The extra money goes into the same EPF account of the employees using their UAN number, and the employer does not contribute to it. VPF also earns interest in the same way as the EPF does. It is considered a low-risk investment. However, some changes occurred in its taxation policy from budget 2021 onwards.
Voluntary Provident Fund (VPF)
VPF is a voluntary contribution plan that can be availed by those who are enrolled for EPF. VPF provides employees an opportunity to make a higher provident fund contribution than EPF contribution.
- Employees can increase their combined EPF and VPF contribution up to 100% of Basic Salary and DA.
- The additional contribution goes into the same EPF account.
- No separate VPF account is created.
- Employers are not required to match VPF contributions.
- VPF follows EPF withdrawal and taxation rules.
The EPF interest rate is recommended by the Central Board of Trustees of EPFO and notified by the government. The approved EPF interest rate for FY 2025-26 is 8.25% per annum.
VPF Taxation Rules
VPF is normally regarded as a tax-efficient investment option since it operates under the EEE (Exempt-Exempt-Exempt) framework, given some requirements and restrictions. There are basically three stages in the process of taxation for VPFs, which include:
- Contribution – Eligible for deduction under Section 80C under the Old Tax Regime
- Interest – Tax-free subject to prescribed contribution limits
- Withdrawal – Tax-free after completing five years of continuous service
However, after the Finance Act, 2021, the exemption on interest is restricted for employees making higher contributions.
Tax Benefit on VPF Contribution Under Section 80C
Employee contributions to VPF are deductible from income tax under Section 80C of the Income Tax Act, 1961. But this advantage can be enjoyed only under the Old Tax Regime. The contribution is deducted within the aggregate ceiling of ₹1.5 lakhs provided for under Section 80C every financial year. Other deductions included in this limit are EPF, PPF, ELSS mutual fund, life insurance premium, NSC, and principal repayment of home loan.
- Old Tax Regime : Eligible under Section 80C within ₹1.5 lakh limit
- New Tax Regime : No Section 80C deduction available
Taxation of VPF Interest: ₹2.5 Lakh and ₹5 Lakh Rule
The major change in terms of VPF taxation came through the Finance Act, 2021. Prior to that, the interest income arising from the interest on EPF and VPF contributions was exempt from any form of tax regardless of the size of the contribution. Starting from fiscal year 2021-22, interest income from employee contributions beyond the prescribed limit will be liable for taxation. In case the employer makes any contribution to the employee’s PF account, then the limit for exemption will be ₹2.5 lakh annually. In case there is no contribution by the employer, the limit of exemption goes up to ₹5 lakh annually.
Taxation on VPF Withdrawal
Withdrawing from the VPF is tax free when the employee fulfills five years of continual service. The maturity value, which includes the principal and interest earned on it, will not be subjected to any tax. In case of withdrawing even before the completion of five years, then tax problems can arise.
TDS Rules on Premature Withdrawal
In case a person makes a withdrawal from PF account prior to serving for five years continuously and the amount withdrawn is more than ₹50,000, then Section 192A of the Income Tax Act, 1961 applies.
TDS will be deducted at the rate of 10% in case the PAN is available. If PAN is not furnished, tax is deducted at the applicable higher rate. However, eligible taxpayers can submit Form 15G or Form 15H to avoid TDS deduction, subject to meeting the prescribed conditions. It is important to note that TDS is only a deduction at the time of withdrawal, and the final tax liability is determined while filing the income tax return.
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VPF Tax Treatment Under Old and New Tax Regime
The major difference between the two tax regimes is the availability of the upfront Section 80C deduction.
Conclusion
The Voluntary Provident Fund can still be considered as a viable choice for retirement savings for salaried employees owing to its safety, interest rate based on the Employees’ Provident Fund, and taxation advantages. Nevertheless, for employees who contribute more money, they must bear in mind that any amount above the specified limit will be subject to taxation.
