The Voluntary Provident Fund (VPF) is an extension of the Employee Provident Fund (EPF), where employees can choose to contribute more than the mandatory 12% of their basic salary and dearness allowance (DA) toward their provident fund. It is a safe, government-backed savings scheme offering attractive interest rates, making it a preferred choice for long-term retirement savings

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Key Features of VPF:

Voluntary Nature: Unlike the mandatory 12% EPF contribution, VPF contributions are entirely optional and self-directed. This means you have complete control over how much extra you want to contribute.

No Upper Limit: While EPF has a mandatory ceiling, VPF allows contributions up to 100% of your basic salary and dearness allowance (DA). This flexibility makes VPF an excellent option for employees who want to maximize their retirement savings.

Part of EPF: Since VPF is part of the EPF ecosystem, it shares similar features with EPF, including the same interest rate, tax treatment, and withdrawal rules. This integration makes it seamlessly manageable within your existing EPF account.

Annual Review: The VPF interest rate is reviewed every year by the Central Board of Trustees (CBT) of EPFO in consultation with the Finance Ministry. This annual review ensures that the rates remain competitive and aligned with economic conditions.

The EEE (Exempt-Exempt-Exempt) tax status of VPF makes it exceptionally attractive. Your contributions, the interest earned, and the maturity proceeds are all tax-free under specific conditions, provided you maintain the account for a minimum of five years.

EPF and VPF Contributions – Employee and Employer Breakdown

Understanding the contribution structure is crucial to maximize your VPF benefits. The contribution framework for EPF and VPF is distinct, and it is important to know how both employee and employer contributions work.

Employee Contributions:

Mandatory EPF: Employees must contribute 12% of their basic salary and dearness allowance to their EPF account every month. This is a non-negotiable component for all salaried employees working in organizations registered with EPFO.

Voluntary VPF: Beyond the mandatory 12%, employees can contribute any additional amount as VPF. There is no cap on this voluntary contribution—it can go up to 100% of your basic salary and DA.

Example: If your basic salary is ₹50,000 and DA is ₹5,000 (total ₹55,000):

Mandatory EPF contribution: ₹55,000 × 12% = ₹6,600 per month
You can contribute an additional ₹55,000 × up to 88% = up to ₹48,400 as VPF per month
Total monthly savings (EPF + VPF) = up to ₹55,000

Employer Contributions:

EPF Contribution: Employers are required to contribute 12% of the employee's basic salary and DA to the EPF account. This is a mandatory corporate obligation and is an additional cost to the company, separate from the employee's salary.

VPF Contribution: No employer contribution is made toward VPF. The VPF is entirely funded by the employee's voluntary contributions. Employers simply facilitate the deduction and deposit of VPF amounts but do not match these contributions.

How to Calculate Interest on VPF?

Interest on VPF is calculated monthly on the running balance but credited at the end of the financial year.
The formula to calculate monthly interest is:

Monthly Interest = Outstanding Balance X Annual VPF Interest Rate /1200

Where:

Opening Balance = Total VPF and EPF balance at the beginning of each month
Annual VPF Interest Rate = The interest rate declared by EPFO (currently 8.25% for FY 2024-25 and 2025-26)
For example, if you contribute ₹10,000 per month, and the interest rate is 8%, the monthly interest earned will be ₹(120,000 × 8% ÷ 12) = ₹800. So, yearly interest is ₹9,600

Historical VPF Interest Rates

VPF interest rates have been consistently attractive, helping employees build retirement savings with considerable compounding benefits. Below is a snapshot of historical rates:

Financial Year

VPF Interest Rate (%)

2024-25

8.25

2023-24

8.15

2022-23

8.10

2021-22

8.50

2020-21

8.50

2019-20

8.65

2018-19

8.65

2017-18

8.55

2016-17

8.80

2015-16

8.80

Tax Benefits on Contributions:

Both EPF and VPF contributions qualify for tax deduction under Section 80C of the Income Tax Act, 1961. The aggregate deduction limit under Section 80C is ₹1,50,000 per financial year.

Tax Treatment After Withdrawal:

Interest earned on annual contributions up to ₹2,50,000 is tax-free
Interest exceeding ₹2,50,000 in annual contributions becomes taxable
Withdrawals after 5 years of contribution are completely tax-free

This tax-efficient structure makes VPF one of the most prudent long-term investment choices for Indian salaried professionals.

Practical Example of VPF Interest Calculation:

Let us work through a detailed example to understand how VPF interest is calculated in real life.

Assumptions:

Monthly VPF Contribution: ₹10,000
Annual VPF Interest Rate: 8% per annum
Duration: 1 Year (12 months)

Monthly Breakdown:

Month

Opening Balance

Contribution

Closing Balance

Interest Calculation

April

₹0

₹10,000

0 (first month)

May

₹10,000

₹20,000

(₹10,000 × 8%) ÷ 12 = ₹67

June

₹20,000

₹10,000

₹30,000

(₹20,000 × 8%) ÷ 12 = ₹133

July

₹30,000

₹10,000

₹40,000

(₹30,000 × 8%) ÷ 12 = ₹200

August

₹40,000

₹10,000

₹50,000

(₹40,000 × 8%) ÷ 12 = ₹267

September

₹50,000

₹10,000

₹60,000

(₹50,000 × 8%) ÷ 12 = ₹333

October

₹60,000

₹10,000

₹70,000

(₹60,000 × 8%) ÷ 12 = ₹400

November

₹70,000

₹10,000

₹80,000

(₹70,000 × 8%) ÷ 12 = ₹467

December

₹80,000

₹10,000

₹90,000

(₹80,000 × 8%) ÷ 12 = ₹533

January

₹90,000

₹10,000

₹100,000

(₹90,000 × 8%) ÷ 12 = ₹600

February

₹100,000

₹10,000

₹110,000

(₹100,000 × 8%) ÷ 12 = ₹667

March

₹110,000

₹10,000

₹120,000

(₹110,000 × 8%) ÷ 12 = ₹733

Total Interest Earned in the Year = ₹67 + ₹133 + ₹200 + ₹267 + ₹333 + ₹400 + ₹467 + ₹533 + ₹600 + ₹667 + ₹733 = ₹4,400

Total VPF Balance at End of Year = ₹120,000 (contributions) + ₹4,400 (interest) = ₹124,400

This example shows how your money continuously earns interest throughout the year, compounding in your favor

Conclusion

VPF is an excellent option for salaried employees looking to boost their retirement corpus with a safe investment backed by the government’s high-interest rates. Understanding how VPF interest is calculated, combined with strategic investments in top stocks, can maximize your wealth over time. Stay updated with annual interest rate revisions and align contributions according to your financial goals.

Frequently Asked Questions (FAQs)

What is the current VPF interest rate?

The VPF interest rate for FY 2024-25 and 2025-26 is 8.25% per annum.

Can I contribute more than 12% of my salary in VPF?

Yes, you can contribute up to 100% of your basic salary and DA voluntarily via VPF.

Is the interest earned on VPF taxable?

Interest up to ₹2.5 lakh annually is tax-free; any amount above this is taxable according to your slab.

How is interest on VPF calculated?

Interest is calculated monthly on the running balance and credited annually at the declared interest rate.

What is the difference between EPF and VPF?

EPF is mandatory with 12% contributions from both employee and employer. VPF is optional where the employee can contribute beyond 12%, but without employer contribution.

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