Why Should You Choose VPF Over PF?

Introduction

India is home to several government and non-government retirement saving schemes. Among them, the Employees’ Provident Fund (EPF) is quite popular. It is a scheme in which both the employer and employee contribute a certain percentage of the employee’s salary every month. In addition, there is the Voluntary Provident Fund (VPF), a lesser-known but powerful tool. It allows employees to contribute up to 100% of their basic salary, dearness allowance, and retaining allowance. The employer, however, does not make any contribution. Simply put, VPF is an extension of EPF that enables employees to top up their PF contributions. 

VPF is usually considered better than standard PF because of its contribution flexibility, potentially higher returns, and seamless enrolment, among other advantages. This article explains why. 

VPF vs EPF – Quick Comparison

EPF is a long-term saving scheme designed for salaried individuals in India. Under this scheme, both the employer and employee contribute 12% of the employee’s basic salary, dearness allowance, and retaining allowance. Out of the employer’s 12% contribution, 8.33% goes to the Employees’ Pension Scheme (EPS), and the balance 3.67% goes to EPF.

VPF is an extension of EPF. It allows employees to voluntarily increase their contribution beyond 12%, up to 100% of their basic salary, dearness allowance, and retaining allowance. However, the employer’s contribution remains fixed at 12% and does not increase with the employee’s voluntary contribution. 

Here’s a quick glance at the differences between the two: 

Key Reasons To Choose VPF Over Standard PF

1. Higher Potential Returns

VPF earns the same interest rate as EPF, which is generally higher than most other PFs, such as the Public Provident Fund (PPF). For instance, the EPF interest rate for FY 2025-2026 is 8.25%, whereas it is 7.1% for PPF. 

Since you have the flexibility to invest more with VPF, you can build a larger principal base, which in turn earns more interest, leading to potentially higher returns through the power of compounding. 

2. Additional Tax Savings 

Much like EPF, employee contributions to VPF can be claimed as a deduction of up to ₹1.5 lakh annually under Section 80C. The maturity proceeds are also tax-free if withdrawn after five years of continuous service. 

Note: Earlier, EPF interest was entirely tax-free. However, post Budget 2021, if an employee’s contribution to EPF or VPF exceeds ₹2.5 lakh in a year, the interest earned on the excess amount becomes taxable. 

3. Safety and Portability 

Like EPF, VPF is managed by the Employees’ Provident Fund Organisation (EPFO) and enjoys a sovereign guarantee. The scheme offers a fixed interest rate every year, making it a safe investment. Moreover, even though the account is employer-linked, it is portable. Meaning, you can carry it forward to your next employer in case of a job switch. 

4. Easy Enrolment 

While you may need to enrol in EPF by visiting the EPFO website and submitting the required form and documents, opting for VPF is much simpler. You only need to inform your employer to increase your contributions. The amount is then automatically deducted from your salary, making the process hassle-free. 

Comparisons That Matter

Here’s a comparison of EPF/VPF with other popular retirement schemes: 

Lock‑In, Withdrawal and Liquidity Rules

Since VPF is an extension of EPF, the same withdrawal rules apply. 

You can withdraw 100% of your account balance under the following conditions:  

1. Upon retirement, i.e., on attaining the age of 58 years
2. In case of premature death, your nominee will receive the amount 
3. If you have been unemployed for two months or more

Partial withdrawals are allowed in two cases: 

• If you are unemployed for at least one month (up to 75% of your account balance)
• In special circumstances such as marriage, medical emergencies, higher education, or housing (subject to certain conditions)

There is no particular lock-in period for VPF. However, if you withdraw your EPF/VPF balance before completing five years of continuous service, the withdrawn amount becomes taxable. Thus, to enjoy the voluntary provident fund tax benefit, you must stay invested for at least five years. 

When it comes to liquidity, EPF/VPF are better than PPF, which has a specific lock-in period of 15 years. Partial withdrawals are permitted only after six years and are subject to conditions.  

How To Start Contributing To VPF

 -Just notify employer; HR/Payroll initiates deduction 

 -No need to open new accounts or forms.

 VPF vs Other Long-Term Savings

 -Brief side-by-side snapshot with PPF and NPS 

Who Should Prioritize VPF?

VPF is ideal for you if: 

• You are a salaried individual who wants to save for retirement 
• You want a scheme that offers higher returns than PPF or traditional fixed deposits
• You want to save tax while investing for retirement 
• Your risk appetite is low to moderate, and you prefer guaranteed returns

VPF may not be suitable for you if: 

• You are self-employed
• You want a highly liquid investment 

Conclusion

An extension of EPF, VPF is a retirement saving scheme that can potentially offer higher returns than traditional PFs. It also provides tax benefits and hassle-free enrolment as contributions are auto-deducted from salary. 

Talk to your payroll manager or HR to enrol in a VPF. Even small additional contributions can compound into a large corpus over time. 

For better planning, consider using online calculators designed to facilitate effective financial management.

Additional Read: 5 Investment Options in India for Retirement Planning