Currently, interest earned on contributions above Rs 2.5 lakh in VPF is taxable. The government is considering increasing this limit. This initiative will give low-middle and middle-income people an opportunity to increase their savings.
New Delhi. The government is considering increasing the existing limit of tax-free contribution to the Voluntary Provident Fund (VPF) under the Employees’ Provident Fund Organization (EPFO). Currently, interest earned on contributions above Rs 2.5 lakh in VPF is taxed. The initiative aims to help low-middle and middle-income people increase their savings and raise more funds for retirement.
According to the Economic Times report, sources familiar with the matter have said that the Ministry of Labor is reviewing the proposal and may discuss it with the Finance Ministry during the upcoming budget deliberations for FY 2026.
What is Voluntary Provident Fund (VPF)?
Voluntary Provident Fund (VPF) is an optional scheme in which salaried employees can contribute to increase their savings in addition to the mandatory EPF. In this, interest is available on the contribution at the same rate as EPF, which is added on an annual basis at a compounded rate. The maximum contribution to VPF can be up to 100% of the basic salary and dearness allowance, which accrues at the same rate of interest as EPF. However, this amount may be subject to tax if withdrawn before completing the minimum period of five years.
Consideration of change in limit of Rs 2.5 lakh
Currently, the limit of getting tax-free interest of more than Rs 2.5 lakh in VPF was introduced in the 2022 budget. Its purpose was to prevent high-income group employees from earning more tax-free interest than bank or fixed deposits using this scheme. Now, the government is considering increasing this limit, so that people of the middle income group can save more.
Fund of Rs 20 lakh crore under EPFO
EPFO has a fund of more than Rs 20 lakh crore, and it has more than 7 crore monthly contributors and more than 75 lakh pensioners. Employees can contribute up to a maximum of 100% to VPF, which is based on their basic salary and dearness allowance. The interest received in this is similar to EPF, which has been given at a rate of more than 8% for a long time.
Interest rate and savings calculation
The interest rate on EPF is 8.10% for FY 2022, 8.15% for FY 2023 and 8.25% for FY 2024. By investing Rs 2.5 lakh per year in EPFO and VPF, you can accumulate around Rs 3.3 crore in 30 years at an annual interest rate of 8.25%.
