Fixed returns are attractive, especially when the rate is higher than that of a fixed down payment (FD). Employees in paid employment receive this from their employee Provident Fund (EPF), which tends to have a higher rate than FDS, but the interest is revised every year (it was set at 8.25% for FY25).
Employees contribute 12% of their basic salary to the EPF and the employer corresponds to the contribution. If someone wants to invest more, they can do this through the voluntary Provident Fund (VPF). In fact, 100% of your basic salary can be invested in EPF and VPF combined. The EPF contribution remains 12% and the VPF contribution can go to 88%. However, the employer only corresponds to the employee’s EPF contribution. The entire amount earns the interested interest for the financial year (it was 8.25% for both in FY25).
But what about recordings? This is where different misconceptions arise.
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Differences in EPF, VPF accounting
Let us illustrate a common misconception with an example. Mr A chose VPF in 2019 to earn a higher interest on part of his savings. He had the impression that because VPF was voluntary, he could withdraw it when he wanted after five years, without any limitations.
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However, this is only partially true. VPF can be voluntary, but withdrawal rules are exactly the same as those of EPF. In fact, the employee Provident Fund Organization (EPFO) is not a separate account of VPF and EPF.
Mr A was therefore surprised to discover that his PF account only showed him his total balance, including the VPF contribution, and that he had to manually calculate his VPF balance.
Moreover, the accounting is different for exempt and non-exempt employers. An exempt employer has his own confidence to manage the PF contributions of his employees according to rules defined by the EPFO. The EPFO itself manages contributions in the case of non-exempt employers.
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For employees of non-exempt employers, the EPF passbook mentions the employee contribution (EPF+VPF) as a single mention and the employer’s contribution, interest credit and TDS, if applicable. Employers must keep track of the individual record of EPF and VPF on their side. This is not reported to the EPFO.
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For employees of exempt employers, EPF and VPF contribution is separately responsible in the financial year that they have been done, but when the closing balance is transferred to the next financial year, the two bat and in a single entry is called ‘Employee’s contribution’.
Certainly, from the FY22, the EPFO tax has injected at the source (TDS) on interest income at 10% if the annual contribution to EPF+VPF is more than £2.5 Lakh and the interest is more than £5,000, said Sanjay Kesari, Regional Provident Fund Commissioner-I (retired), EPFO.
Lock-ins and limits for recordings
VPF reduction rules do not differ from those which EPF rule. There is a common misconception that VPF has a locking period of five years. Although after five years you can make partial recordings for certain things, such as building, buying or renovating a house, you have to wait longer for other purposes. For example, after seven years you can make partial recordings for your child’s education, or the wedding of your son, daughter, brother, sister or yourself. After 10 years you can withdraw money to pay off a housing loan.
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But even if you wait so long, you cannot withdraw 100% of the funds in most situations. Certain formulas are applied that reduce the recording limit for different purposes.
So although VPF offers attractive interest rates, you must take into account the withdrawal rules and the procedure before you undertake.
