EPFO: Taxation rule on Voluntary Provident Fund — the ₹2.5 lakh VPF threshold, explained
Planning for long-term financial goals or retirement, the employees provident fund (EPF) and voluntary provident fund (VPF) are reliable and safe tools at the disposal of a conservative investor looking for consistent long-term returns. As government-backed savings schemes with generally high rate of interest and tax-free payout, the EPF and VPF are effective investment tools.
EPF and VPF offer 8.25% interest in FY26, but EPF contributions are mandated for employee and employers. On the other hand, VPF is a non-compulsory add-on over and above EPF which allows maximum contribution of up to 100% of basic pay and dearness allowance.
Notably, both also have tax-benefit with annual contributions up to ₹1.5 lakh being exempt under Section 80C of the old tax regime.
Voluntary Provident Fund: What is it?
According to the official EPFO website, VPF is excess investment by employees over the mandatory contribution of 12% of DA and basic salary each by employees and employer under EPF.
In order to opt for VPF, an employee has to approach their employer, payroll or the HR department at the start of the financial year to provide a declaration form stating the percentage or fixed amount you want to deduct additionally from your monthly salary towards VPF. Please note that you cannot start VPF online through the EPFO portal.
VPF taxation rule — ₹2.5 lakh threshold, explained
Historically, VPF was entirely tax-free (known as EEE). However, since 2022, the central government has introduced a new rule restricting tax-free interest for very high contributors.
If your total annual EPF contribution (Employee’s 12% + VPF) exceeds ₹2,50,000 in a financial year, the interest earned on the excess amount (above ₹2.5 lakh) will be added to your taxable income and taxed at your applicable slab rate.
Notably, if your employer does not contribute to EPF, this limit is ₹5,00,000.
According to CA Dr Suresh Surana, founder of RSM India, to compute interest on VPF, the annual provident fund statement would be maintained in two separate parts-taxable and non-taxable contribution accounts as follows:
