Voluntary Provident Fund (VPF): Tax Rules, Interest & the Rs 2.5 Lakh Limit
Reviewed by CA Nikhil Gupta · Last reviewed 17 June 2026
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) |
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
Source and review trail
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- Primary category
- Income Tax
- Official starting point
- www.incometax.gov.in
Page source links
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Primary sources & related provisions
Statutory provisions referenced in this guide: