Voluntary Provident Fund Tax Benefit


Voluntary Provident Fund (VPF) is a retirement savings scheme in India where an employee can voluntarily contribute a portion of their salary towards a retirement corpus, in addition to the mandatory Provident Fund contribution. Employees can contribute up to 100% of their basic salary and dearness allowance, and the employer also contributes an equal amount as they do for the mandatory Provident Fund.

The contributions and the interest earned on VPF are tax-exempt, and the VPF account is managed by the Employees' Provident Fund Organization (EPFO). Withdrawals from VPF are allowed for specific purposes like housing and medical emergencies, as per EPFO rules, making it a tax-efficient way for employees to save for their retirement.


The current interest rate for Voluntary Provident Fund (VPF) contributions is 8.25% for the financial year 2024-25. This is significantly higher than the interest rate offered by the Public Provident Fund (PPF).

Features of Voluntary Provident Fund

The table below shows the highlights of the Voluntary Provident Fund scheme:

Feature Description
Contribution Voluntary (beyond mandatory EPF)
Tax Benefit Deduction under Section 80C
Interest Rate Based on Government declaration (currently 8.25%)
Lock-in Period 5 years
Withdrawal Tax-free after 5 years (exceptions apply)
Account Type Government-backed savings scheme

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Tax Benefits of VPF With Other Investments

VPF (Voluntary Provident Fund) is a great option for salaried individuals in India looking to save for retirement and reduce their tax burden. Here's a breakdown of the key tax benefits:

  • Deduction under Section 80C: Contributions made towards VPF are eligible for a tax deduction under Section 80C of the Income Tax Act. You can reduce your taxable income by the amount you contribute to VPF, potentially lowering your tax bracket and saving you money.
  • EEE Tax Exemption: VPF is categorized as E-E-E, which means it is exempt on contribution, exempt from the principal and exempt on interest. It is a beneficial option for saving on taxes. Contributions to VPF are eligible for tax deduction under Section 80C. Salaried employees can also enjoy a tax exemption on the interest earned from this scheme. This allows employees to claim a deduction of up to ₹1.5 lakh under section 80C, and the interest earned under this scheme is exempt from tax. VPF offers high-interest rates of up to 8.5% per year, and the interest accrued under VPF is non-taxable.
  • Tax-Free Maturity: The amount you receive upon maturity from VPF, including principal and accrued interest, is exempt from tax if you withdraw it after five years of continuous contributions. Early withdrawals might be taxable depending on the reason for withdrawal.

Tips to Maximize Tax Savings with VPF

Here are some tips to maximize tax savings with the Voluntary Provident Fund (VPF):

  • Contribute the maximum amount: Contribute up to 100% of your basic salary and dearness allowance to the VPF to maximize the tax benefits. The more you contribute, the higher your tax deductions.
  • Factor in other Section 80C investments: If you're already utilizing other Section 80C investments like life insurance, PPF, or ELSS, subtract those amounts from the ₹1.5 lakh limit to determine the remaining room for VPF contributions.
  • Claim tax deductions under Section 80C: VPF contributions are eligible for deductions under Section 80C, which can help reduce your taxable income and lower your overall tax liability.
  • Leverage the employer's contribution: Since your employer also contributes an equal amount to your VPF, you effectively double your tax-free savings.
  • Consider the interest exemption: The interest earned on your VPF contributions is completely tax-free, further enhancing the tax benefits.
  • Combine VPF with other retirement savings: Complement your VPF contributions with other long-term retirement savings options like EPF, NPS, or personal investments to build a robust retirement corpus.

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Check more on the Voluntary Provident Fund from the links in the table below:

Benefits of Investing in Voluntary Provident Fund

The Voluntary Provident Fund (VPF) is a tax-saving investment option under Section 80C of the Income Tax Act. It offers several benefits:

  • Tax Deductions: VPF allows for tax deductions of up to ₹ 1,50,000 per year. For those in the 30% tax bracket, this can lead to tax savings of around Rs 46,800 annually.
  • Guaranteed Returns: VPF investments are backed by sovereign guarantees, making them absolutely safe. The EPF (which includes VPF) currently offers a guaranteed return of 8.15% per annum.
  • Higher Interest Rates: The interest rate on EPF/VPF investments, currently at 8.65%, is significantly higher than other government-offered investment options, which provide returns in the range of 5-7%.
  • Automatic Contributions: VPF contributions are directly deducted from the salary and deposited into the EPF account, eliminating the need for a separate investment account.

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Frequently Asked Questions

The contributions made to VPF and the interest earned on it are exempt from tax under Section 10(12) of the Income Tax Act.

VPF contributions are eligible for deduction under Section 80C, which can help reduce your taxable income and lower your overall tax liability.

Yes, the interest earned on VPF contributions is completely tax-free.

There is no specific limit on the amount of VPF contributions that can be made. However, the overall limit for deductions under Section 80C is ₹1.5 lakh per year.

Yes, VPF contributions are eligible for deductions under Section 80C of the Income Tax Act.

The ₹2.5 lakh cap on tax-free interest earned on provident fund contributions does not apply to VPF, as the entire interest earned on VPF is tax-free.

Yes, employees can maximize their tax benefits by contributing the maximum amount possible to VPF, subject to the Section 80C limit.

Withdrawals from VPF are generally tax-free, except in certain cases where the funds are used for purposes other than retirement.

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