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:

• The non-taxable contribution account shall have the details of opening balance, contribution below the threshold, interest earned on such contribution and withdrawals made in the relevant year.
• The taxable contribution account shall have the details of the contribution made above the threshold, interest earned thereon and withdrawals made in the relevant year.

Tax exemption: What about contributions?

• Contribution of up to ₹1.5 lakh towards VPF is allowed as a deduction under Section 80C.
• Any lumpsum amount earned from VPF would be exempt from tax provided the withdrawal is made after five years.
• In case of partial or full withdrawal before such period of five years, the same would be subject to tax.

VPF scheme: Key rules and benefits — Quick look

• Contribution Limit: You can contribute up to 100% of your Basic Salary + DA towards VPF.

• Same High Interest: VPF contributions earn the exact same interest rate as standard EPF (currently 8.25% p.a.).
• Employer Match: Your employer is NOT required to match your VPF contributions. They will continue to match only the mandatory 12%.
• Tax Exemption (80C): VPF contributions qualify for tax deductions under Section 80C, up to ₹1.5 Lakhs.
• Lock-in Period: Just like EPF, VPF is locked in until retirement or resignation (minimum five years of continuous service for tax-free withdrawal). Partial withdrawals are allowed for specific emergencies like medical, education, or housing.