The government is considering a special reform in the Employees Provident Fund Organization (EPFO). The tax-free contribution limit to the Voluntary Provident Fund (VPF) under the organization is being considered to be increased from the current Rs 2.5 lakh. Currently, any interest above Rs 2.5 lakh is taxable. The objective of this initiative is to encourage low- and middle-income individuals to increase their savings through EPFO. This will help raise more retirement funds.
According to Business Today, people familiar with the matter revealed that the Labor Department is currently reviewing the proposal and may discuss it with the Treasury Department during the fiscal year 2026 budget review.
What is a Voluntary Provident Fund?
VPF is an optional investment for salaried employees in addition to the mandatory EPF. It can be defined as an extension of EPF, allowing employees to increase their retirement savings and earn the same interest rate as on their original PF deposits. Like EPF, contributions to VPF also grow based on compound interest as returns are released annually. This also falls under EPFO.
For VPF clients, it is important to know that any withdrawals made before completing the minimum five-year period may be subject to tax. Like EPF, VPF funds are released to the account holder’s nominee in the unfortunate event of retirement, resignation or death.
Higher contributions earn the same interest as EPF.
Another feature of VPF is that it is a government-run plan with less risk and higher returns. This contribution is in excess of the 12% contribution an employee makes in his EPFO account. The maximum contribution amount is 100% of the basic salary and family allowance. Under this scheme, the interest is the same as EPF.
What is the tax exemption amount?
The FY22 Budget introduced a voluntary contribution limit of Rs 2.5 lakh to prevent high-income employees from availing the facility to earn tax-free interest over and above interest on bank or fixed deposits. The move is targeted at high-earning employees who avail this facility to earn tax-free interest that is higher than interest from banks or fixed deposits.
Rs 2,000-crore fund under EPFO
EPFO has an average of 70 million monthly contributors, over 7.5 million pensioners and over Rs 2,000 crore in funds. EPFO allows employees to contribute more by opting for Voluntary Provident Fund (VPF). Employees can ask their employer to deduct amounts in excess of the 12% mandatory contribution. The maximum contribution amount to VPF can be up to 100% of the basic salary and family allowance, and the interest rate is the same as the basic contribution.
Generally speaking, VPF falls under the exempt-exempt-exempt category. This means that contributions, interest and proceeds on maturity are all tax-free. EPF contributions up to Rs 1.50 lakh per financial year are eligible for tax deduction under Section 80C of the old tax regime. Employees can contribute up to Rs 2.5 lakh per annum to the VPF without paying additional tax. Provident fund withdrawals and maturity amounts are also tax-free.
voluntary savings rate
EPFO has been offering interest rates above 8% since FY2000, peaking at 90% in FY2012 and maintaining that level for 11 years till FY2000. The PF savings interest rates for FY22, FY23 and FY24 are 8.10%, 8.15% and 8.25% respectively.
EPF and VPF savings
By investing Rs 20,833 every month in EPFO and VPF, you will save Rs 2.50 lakh every year. At an interest rate of 8.25% per annum, you can deposit approximately Rs 3.3 crore in 30 years.
