Income Tax

Voluntary Provident Fund (VPF): Tax Rules, Interest & the Rs 2.5 Lakh Limit

Finin2min Tax Desk·June 2026·7 min readIncome Tax

If your salary slip shows a higher PF deduction than the standard 12%, you may already be contributing to VPF without realizing the tax implications - especially the Rs 2.5 lakh annual cap introduced in 2021 that now subjects excess interest to tax.

What is VPF?

The Voluntary Provident Fund (VPF) is an extension of the Employees' Provident Fund (EPF) scheme that allows a salaried employee to contribute more than the mandatory 12% of basic salary plus dearness allowance to their PF account, up to 100% of basic + DA. VPF contributions earn the same interest rate as EPF (declared annually by the EPFO, historically around 8-8.25%) and carry the same withdrawal rules.

Why People Use VPF

Same high, government-backed interest rate as EPF, typically higher than bank FDs and most debt instruments
Tax deduction under Section 80C for contributions (within the overall Rs 1.5 lakh 80C limit, shared with PPF, ELSS, life insurance premium, etc.)
EEE status historically - contribution, interest, and withdrawal were all tax-free, subject to the 5-year continuous service rule for withdrawal
No separate account opening - it's simply a higher deduction from the same salary, managed by the employer's payroll/PF process

The Rs 2.5 Lakh Annual Limit (Effective FY 2021-22)

Budget 2021 introduced a significant change: interest earned on employee contributions (EPF + VPF combined) exceeding Rs 2.5 lakh in a financial year is now taxable in the hands of the employee. For employees whose employer does not contribute to PF (i.e., government employees in certain schemes without employer contribution), the threshold is Rs 5 lakh.

Particulars	Details
Tax-free contribution limit (EPF + VPF combined)	Rs 2.5 lakh per year (Rs 5 lakh if no employer contribution)
Tax on interest above limit	Interest on the excess contribution is taxable as 'Income from Other Sources'
How it's taxed	The PF trust/EPFO maintains two accounts - taxable and non-taxable - and TDS at 10% is deducted on the taxable interest portion if it exceeds Rs 5,000 in a year (under Section 194A)
80C deduction on contribution	Still available, subject to overall Rs 1.5 lakh 80C cap (old regime only)

Who is affected? This provision primarily affects high earners with substantial VPF contributions - typically those with basic salaries high enough, or VPF contribution percentages aggressive enough, that 12% mandatory EPF + voluntary VPF together exceed Rs 2.5 lakh in a year. For most middle-income salaried employees contributing only the mandatory 12%, this limit is rarely breached.

How the Split Account Works

The EPFO computes two notional accounts within your PF balance from FY 2021-22 onwards:

Non-taxable account: Contains the closing balance as of 31 March 2021, plus contributions up to Rs 2.5 lakh (or Rs 5 lakh) per year from FY 2021-22 onwards, plus interest on both
Taxable account: Contains contributions exceeding the annual threshold from FY 2021-22 onwards, plus interest on those excess contributions

Interest credited to the taxable account is added to your income under 'Income from Other Sources' and taxed at your slab rate, with TDS deducted by the EPFO/trust if the interest exceeds Rs 5,000 in a year.

VPF vs PPF vs NPS: Where Should You Put Extra Savings?

Feature	VPF	PPF	NPS (80CCD(1B))
Interest rate	~8-8.25% (EPFO declared)	~7.1% (govt declared quarterly)	Market-linked (equity + debt)
Lock-in	Until retirement/resignation (partial withdrawal rules apply)	15 years	Until age 60 (partial annuitization required)
Tax-free interest limit	Interest on contributions up to Rs 2.5 lakh/year	No limit - fully exempt	No limit - fully exempt (EEE)
Additional 80C room needed	Yes (shared 1.5 lakh cap)	Yes (shared 1.5 lakh cap)	No - separate Rs 50,000 under 80CCD(1B)

Practical Takeaway

For employees who have exhausted their Section 80C limit through EPF + life insurance + ELSS etc., and are looking for additional tax-efficient long-term savings, NPS under Section 80CCD(1B) (extra Rs 50,000 deduction, available even in the new regime in some forms) or PPF (fully tax-free interest with no upper limit) may be more tax-efficient than pushing VPF contributions beyond the Rs 2.5 lakh threshold.

Frequently Asked Questions

What is the Rs 2.5 lakh VPF limit and when does it apply? ▼

Since FY 2021-22, interest earned on your combined EPF and VPF employee contributions exceeding Rs 2.5 lakh in a financial year is taxable as 'Income from Other Sources'. The limit is Rs 5 lakh if your employer does not contribute to your PF account at all. Contributions and interest within the limit remain fully tax-free.

Is VPF contribution eligible for Section 80C deduction? ▼

Yes, VPF contributions qualify for deduction under Section 80C, but only within the overall Rs 1.5 lakh limit shared with EPF, PPF, ELSS, life insurance premiums, and other eligible investments. This deduction is only available under the old tax regime.

How do I know if my VPF interest is being taxed? ▼

Check your PF passbook on the EPFO portal - from FY 2021-22 onwards, EPFO maintains separate taxable and non-taxable interest components for accounts where contributions exceeded the threshold. The taxable interest is also reflected in your Form 26AS if TDS under Section 194A was deducted (applicable when taxable interest exceeds Rs 5,000).