Voluntary Provident Fund

Voluntary Provident Fund (VPF) refers to the voluntary contribution that an employee makes towards his Provident Fund Account over and above the mandatory 12% of his basic salary. VPF is fixed at a proportion of the salary and its percentage cannot be reduced or increased midyear.

VPF is available only to salaried employees and is linked to the salary. A maximum of 100% of basic salary and dearness allowance is the cap for how much one can invest in VPF. The sum, then gets deducted on a monthly basis and added to the Provident Fund pool. The employer makes no contribution towards the VPF.


Contributions made to VPF is exempt from tax benefits which can be availed under section 80C. There is no monetary limit to how much can be invested in VPF. The initial investment, interest earned and maturity amounts are not taxable.

Interest Earnings

The interest rate of VPF is same as or marginally higher than that of Employees Provident Fund. Both are fixed by the Employees Provident Fund Organisation, unless a private trust is involved. The rate maybe changed on an annual basis by the organization. The VPF interest is not linked to the market.

Duration of VPF and Withdrawal of Funds

There is not fixed term for compulsorily holding the VPF. One may close the account at the time that they leave their job, and withdraw the funds. It the person has worked for less than five years at the job, the withdrawal amount is subject to taxation. A loan may also be taken out on the VPF account.

What are unrecognised employee provident funds (EPF)?

An unrecognized provident fund refers to a provident fund started and run by the employer and employees in an organization without the approval of the Commissioner of Income Tax.  This lack of recognition plays an important when taxability of provident funds are considered. The tax treatment of recognized and unrecognized funds is different under the law. An unrecognized employee provident fund offers far lesser benefits than a recognized employee provident fund or a public provident fund.

The deductions under section 80C are not available for amounts invested in unrecognized employee provident funds. If the funds are withdrawn before retirement , the employee’s contribution is not taxable but the interest earned thereon is taxable. The employer’s contribution including the interest earned is not considered as ‘income’ and isn’t subject to income tax at the time the contribution is made. However, when the employee withdraws the amount from his provident fund account on withdrawal, both the employer’s contribution towards the fund and the interest are taxable as salary income.


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