The government is considering a special change under the Employees’ Provident Fund (EPFO). The limit of investment in the Voluntary Provident Fund (VPF) under this organization can be increased from Rs 2.5 lakh with tax-free interest. At present, any interest earned above Rs 2.5 lakh comes under tax. Its first objective is to encourage low-middle and middle-income individuals to increase their savings through EPFO. This will help to raise more funds for retirement. According to sources, the Ministry of Labor is reviewing this proposal and may discuss it with the Finance Ministry in the budget for FY 2026 – as reported by Economic Times.
What is Voluntary Provident Fund
Voluntary Provident Fund is an optional scheme in which employees can contribute in addition to the mandatory EPF. It allows the employee to increase his retirement savings and avail the same interest rate as EPF. VPF also offers compounding interest, which increases the savings over time. Withdrawals made before the minimum period of 5 years in VPF are taxable. Like EPF, VPF funds are also given to the nominee at the time of retirement, resignation or death of the account holder.
VPF and EPFO contributors
Another specialty of VPF is that it is a government-run scheme. In which the risk is low and the returns are high. EPFO has about 7 crore monthly contributors and more than 7.5 lakh pensioners. It has a fund of more than Rs 20 lakh crore. EPFO gives employees the option to contribute more through VPF. Employees can request their employer to deduct more than the mandatory 12% contribution. The maximum contribution from VPF can be up to 100% of the basic salary and dearness allowance. Generally, VPF falls under the exempt tax category. This means that the contribution, interest and maturity income are all tax-free.
Tax on VPF
The tax free limit of Rs 2.5 lakh was imposed on VPF so that people from high income groups cannot misuse it and earn more tax-free interest. The purpose of this limit was to prevent high-income employees from earning more tax-free interest than bank or FD.
You can withdraw the interest amount you get on the amount deposited in VPF. You do not have to pay any tax on all these. You get a lot of benefit in terms of tax by investing in VPF.
VPF Interest Rates
EPFO has been paying more than 8% interest since FY78, which reached 12% in FY90 and remained at this level for 11 years till 2000. The PF interest rate was 8.10% for FY22, 8.15% for FY23 and 8.25% for FY24.
VPF and EPFO savings
If you invest Rs 20,833 every month in VPF and EPFO, which amounts to Rs 2.5 lakh annually and continue this investment for 30 years at an interest rate of 8.25%, you can save Rs 33 crore.