The government is considering a special change under the Employees’ Provident Fund Organization (EPFO). It is considering increasing the limit of tax-free contribution to the Voluntary Provident Fund (VPF) under this organization from the current Rs 2.5 lakh.
At present, any interest earned above Rs 2.5 lakh comes under tax. The objective of this initiative is to encourage low-middle and middle-income individuals to increase their savings through EPFO. This will help in raising more funds for retirement.
As per a report in Economic Times, published in Business Today, sources familiar with the matter have indicated that the Labour Ministry is currently reviewing the proposal and may discuss it with the Finance Ministry during the budget deliberations for FY26.
What is Voluntary Provident Fund?
VPF is an optional investment made by salaried employees in addition to the mandatory EPF. It can be defined as an extension of EPF that allows employees to increase their retirement savings and earn the same rate of interest as their original PF deposits. Like EPF, contributions to VPF also grow as per compound interest, as returns are released on an annual basis. It also comes under EPFO.
It is important for VPF customers to know that any withdrawal made before completing the minimum period of five years may be subject to taxation. Like EPF, VPF funds are given to the nominee on retirement, resignation or in the unfortunate event of death of the account holder.
Higher contribution gives the same interest as EPF.
Another specialty of VPF is that it is a government run scheme, in which risk is low and returns are high. The contribution made in this is more than the 12 percent contribution made by an employee in his EPFO account. The maximum contribution is up to 100 percent of the basic salary and dearness allowance. Under this scheme, interest is given at the same rate as EPF.
The limit of Rs 2.5 lakh on tax-free
voluntary contributions was introduced in the FY22 budget to prevent high-income employees from using the facility to earn more tax-free interest than the interest offered by banks or fixed deposits. The move was for high-income employees who were using this facility to earn more tax-free interest than the interest offered by banks or fixed deposits.
20 lakh crore funds under EPFO
EPFO has an average of 70 million monthly contributors, over 7.5 million pensioners and a fund of over Rs 20 lakh crore. EPFO allows employees to contribute more by opting for Voluntary Provident Fund (VPF). An employee can request his employer to deduct more than the mandatory 12% contribution. The maximum contribution to VPF can be up to 100% of the basic salary and dearness allowance, with the same rate of interest as the basic contribution.
Generally, VPF falls under the exempt-exempt-exempt tax category. This means that contributions, interest and maturity proceeds are all tax-free. EPF contributions up to Rs 1.5 lakh per financial year are eligible for tax deduction under Section 80C of the old tax regime. Employees can contribute up to Rs 2.5 lakh annually to VPF without facing additional taxes. Withdrawals and maturity proceeds from the provident fund are also exempt from taxes.
VPF Interest Rates
EPFO has been offering an interest rate of over 8% since FY78, reaching a peak of 12% in FY90 and maintaining that level for 11 years till FY00. The interest rate on PF savings was 8.10% for FY22, 8.15% for FY23 and 8.25% for FY24.
Saving in EPF and VPF
By investing Rs 20,833 per month in EPFO and VPF, you will accumulate Rs 2.5 lakh per year. At an annual interest rate of 8.25%, you can accumulate about Rs 3.3 crore in a period of 30 years.
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