For salaried individuals, the Provident Fund is one of the most trusted tools for long-term savings and retirement planning. While the Employee Provident Fund (EPF) is mandatory for employees of eligible organisations, there is another powerful yet lesser-known component called the Voluntary Provident Fund (VPF). It allows employees to contribute more than the statutory limit to their PF account, offering higher savings potential and stable, risk-free returns. Understanding how the VPF works and how it complements your broader investment strategy can help you build wealth safely and efficiently.
Understanding the Voluntary Provident Fund
The Voluntary Provident Fund is an optional extension of the EPF that enables employees to voluntarily contribute more than the standard 12 per cent of their basic salary and dearness allowance. While the employer is not obligated to match this additional contribution, the funds deposited under VPF are added to the same PF account and earn interest at the prevailing EPF rate.
The key advantage of VPF is that it combines the convenience of payroll deduction with the safety of government-backed returns. It is a suitable option for individuals seeking guaranteed, tax-efficient growth without market risk.
Difference between EPF and VPF
The Employee Provident Fund (EPF) requires both employer and employee contributions of 12 per cent each, as per the EPF Act. However, in the Voluntary Provident Fund, only the employee contributes beyond the mandatory limit, up to 100 per cent of the basic salary and dearness allowance.
Both contributions are credited to the same account and earn the same rate of interest. The VPF, therefore, acts as an extension of the EPF, enabling you to accumulate more wealth under a single, tax-efficient scheme.
Interest rate and compounding benefits
One of the biggest advantages of the Voluntary Provident Fund is that it earns interest at the same rate as the EPF, which is declared annually by the Employees’ Provident Fund Organisation (EPFO). The rate typically ranges between 8 per cent and 8.5 per cent per annum and is compounded yearly.
Because of this compounding effect, contributions made through VPF grow significantly over time. For example, a monthly contribution of Rs. 10,000 to VPF at 8.15 per cent can grow to more than Rs. 18 lakh in ten years, assuming consistent contributions and no withdrawals.
Tax benefits under the VPF
The Voluntary Provident Fund offers the same tax advantages as the EPF, making it an excellent option for individuals looking to save while reducing their tax liability. Contributions made to the VPF are eligible for deduction under Section 80C of the Income Tax Act, up to Rs. 1.5 lakh per financial year.
The interest earned is tax-free, provided the employee maintains continuous service of at least five years. Additionally, withdrawals after this period are exempt from tax, ensuring that the scheme remains one of the most efficient and safe tax-saving instruments for salaried employees.
Withdrawal and transfer rules
The withdrawal and transfer process for the Voluntary Provident Fund is identical to that of the Employee Provident Fund. Partial withdrawals are permitted for specific purposes such as marriage, education, home purchase, or medical emergencies, subject to the conditions prescribed by the EPFO.
When you change jobs, your entire PF balance, including the voluntary contributions, can be transferred seamlessly using your Universal Account Number (UAN). This continuity ensures that your long-term savings remain consolidated and continue to earn interest under the prevailing rate.
Comparing VPF with other investment options
The Voluntary Provident Fund stands out among fixed-income instruments due to its combination of safety, tax efficiency, and compounding. Unlike market-linked options such as mutual funds or equities, the VPF guarantees capital protection. While it may offer slightly lower returns compared with high-risk investments, its reliability makes it ideal for conservative investors.
Compared with traditional savings schemes like bank fixed deposits, the VPF’s tax-free interest provides a clear advantage. For individuals in higher tax brackets, the effective post-tax return on VPF often exceeds that of most fixed-income alternatives.
Who should invest in VPF
The Voluntary Provident Fund is best suited for salaried individuals seeking long-term wealth creation with minimal risk. It is particularly beneficial for those who:
- Have a stable monthly income.
- Want to increase retirement savings beyond the EPF contribution.
- Prefer assured returns and tax benefits.
- Are risk-averse and wish to avoid market volatility.
It is also ideal for employees who have already exhausted their Section 80C limit through EPF and other investments but still wish to save more in a secure, tax-efficient manner.
Why diversification beyond VPF matters
While the Voluntary Provident Fund offers unmatched safety and stability, it does not provide liquidity or flexibility for short-term goals due to its withdrawal restrictions. To maintain financial balance, it is important to diversify by adding instruments that offer easier access to funds when required.
Fixed Deposits (FDs) are an excellent complement to VPF contributions. Bajaj Finance, for example, offers digital FDs with competitive interest rates, flexible tenures from 12 to 60 months, and high safety ratings—CRISIL AAA/STABLE and ICRA AAA/STABLE. Investors can choose cumulative options for long-term compounding or non-cumulative FDs for periodic income. By pairing the predictability of VPF with the accessibility of Bajaj Finance FDs, you can achieve both long-term growth and short-term liquidity.
How to maximise the benefits of VPF
To make the most of your Voluntary Provident Fund, start contributing early in your career and maintain consistency throughout your working years. Avoid frequent withdrawals to take full advantage of compounding. Review the interest rate declared by the EPFO annually and plan your contributions based on your long-term financial goals.
You can also set up automatic salary deductions to ensure disciplined savings. Combining the VPF with other fixed-income investments such as Bajaj Finance FDs provides a well-rounded approach to financial security.
Final thoughts
The Voluntary Provident Fund is a safe, government-backed savings option that allows you to build substantial wealth through regular contributions and compounding. It complements the Employee Provident Fund by offering higher contribution limits, tax-free interest, and long-term stability. However, since liquidity is limited, diversifying with flexible investments such as Bajaj Finance Fixed Deposits ensures that you maintain both financial security and accessibility. Together, these instruments can help you achieve steady, risk-free growth and a financially secure retirement.