Voluntary Provident Fund (VPF): Understanding its Benefits and Interest Rate

Ask anyone about the best, risk-free way to save for retirement as a salaried employee, and they'll tell you not to worry about it if you have a Provident Fund (PF) with your company. But the catch is you cannot contribute greater than 12% of your salary towards your PF.

If you want to increase your retirement corpus, you can apply for Voluntary Provident Funds (VPFs) instead. This way, your parked funds will benefit from the relatively higher interest rates. Plus, you won’t have to worry about market fluctuations.

We've got you covered if you want more resources to understand VPFs. Read on to learn more about the benefits, interest rates and returns you can expect through this investment avenue.

What is a VPF?

Put simply, a VPF is a savings scheme of the Government that allows employees to contribute a percentage of their salary higher than their 12% PF contribution. The investment amount can exceed 100% of the investor's basic salary and dearness allowance. Note that although there's no upper limit on the contribution amount, VPF contributions over Rs. 2.5 lakhs are taxable.

Remember that the VPF is an extension of the Employee Provident Fund (EPF). This means that employees working at organisations established by the Employees’ Provident Fund Organization of India, with an active EPF account and a monthly salary are eligible to start a VPF. Moreover, the funds parked through the VPF scheme earn interest at an interest rate decided by the Government of India. But that is not all.

Unlike the Employee Provident Fund (EPF), employees and employers are not obligated to contribute to this scheme. That said, if one starts a VPF, they cannot pull out of it before the base tenure of five years is up.

What are the benefits of a VPF?

1. High interest rate

Funds parked in a VPF earn higher interest than savings-focused financial instruments like savings accounts.

Note that the current interest rate for VPFs is 8.10% p.a., and the interest accrued on voluntary contributions of up to 1.5 lakhs are tax exempt as per Section 80C of the Income Tax Act.

2. Easy application process

Starting a VPF is as simple as filling up the registration form and approaching the company’s HR/Finance team to seek an additional contribution to the EPF. Once the authorities approve your application, the existing EPF account will automatically get converted to a VPF account.

3. Easy transfer process

Similar to EPFs, one can easily transfer the VPF when they move from one job to the next.

4. Safe option for investment

Unlike the investment avenues managed by private entities that offer good returns with significant risk, the VPF is managed by the Government of India. The Government decides the interest earned is independent of market fluctuations. This means that there aren't any major risks involved. Naturally, VPFs make for a much safer investment avenue than other privately backed long-term investment instruments.

5. Tax saving investment alternative

VPFs are an excellent option if you’re looking for a tax-saving investment avenue for the long term. This is because they fall under the EEE category, meaning the funds are exempt from taxes on contributions, exempt on taxes on principal and exempt on taxes on interest as well. This means investors can earn higher returns on their investments and amass funds to help them through major milestones of life.

6. Nomination facility

VPFs also come with a nomination facility. This means that VPF account holders needn’t worry about what will happen to their hard-earned savings in the event of an untimely demise. After all, if that happens, the nominee or the legal heir gets access to the funds stored in the VPF account.

7. Loans and withdrawals

A VPF can act as a source of funds in an unexpected financial emergency. Account holders can withdraw funds partially or fully and even take loans against their VPF funds. That said, they must bear tax implications if they withdraw funds before the lock-in period.

What is the VPF interest rate?

The VPF interest rate is 8.10% for the financial year 2023-24. Note that usually, these rates are similar to the interest rates of EPFs, given VPFs are ultimately a subset of EPFs. This means that the interest rate changes yearly depending on the rates decided by the Employees' Provident Fund Organization and the Finance Ministry.

What are the VPF tax benefits?

According to Section 80C of the Income Tax Act, account holders can claim VPF tax exemptions on contributions of up to Rs. 1.5 lakhs annually. Along with the principal, the interest earned is tax-exempt as well. Furthermore, the interest accrued and the maturity amount redeemed post retirement aren’t subject to wealth tax.

That said, remember that if the account holder withdraws funds from the VPF before the lock-in period of five years ends, they must pay a wealth tax on the interest and maturity amount.

How to open a VPF account?

To open a VPF account at their company, one must contact your HR/Finance department and request to contribute to the VPF. Then they must fill out the registration form and mention the amount they wish to contribute to the employer. Most employers will ask employees to invest in the VPF scheme at the beginning of the financial year. That said, one can request to start the scheme at any time.

How to withdraw funds from a VPF account?

If one wants to withdraw funds from the VPF account before their tenure ends, they must submit Form-31 and a formal letter for VPF withdrawal. Additionally, they must also submit details like the EPF number, bank details, a cancelled cheque and the postal address.

Note that the documents must be self-attested before submission.

How to withdraw funds from a VPF account?

If one wants to withdraw funds from the VPF account before their tenure ends, they must submit Form-31 and a formal letter for VPF withdrawal. Additionally, they must also submit details like the EPF number, bank details, a cancelled cheque and the postal address.

Note that the documents must be self-attested before submission.

Now that you know all about the VPF account, the benefits of opening one and the interest rates associated with them, you can decide whether you want to invest in it.

If you’re looking to save for your retirement in other ways, consider partnering with Tata Capital's Mutual Fund App. We offer comprehensive retirement solution plans to cover all your post-retirement needs safely.