Should you invest in Voluntary Provident Fund – VPF?

(Before we begin – PF = Provident Fund, EPF = Employee Provident Fund, VPF – Voluntary Provident Fund, PPF – Public Provident Fund)

If you are a salaried employee in India, chances are that you would be contributing a chunk of your income towards your PF – Provident Fund. Currently, any company with 20 or more employees on its payroll need to have PF component as a part of salary.


Typically, an employer deducts 12 percent of basic salary of employee and contributes equivalent amount towards PF. This money is parked in a separate PF account which is maintained by the government.

It is an interest bearing account, with current rate of interest at 8.65%. You can withdraw this close to retirement, being unemployed for some time or some special cases like construction of house/ wedding/ kids’ education, medical emergency etc. (There are different rules for each cases which you can Google & read in detail).

PF can be a good tool to save for long term. And the good thing is that you can increase your contribution and thus accelerate your long term savings.

Should you invest in Voluntary Provident Fund - VPF?

How Voluntary Provident Fund (VPF) works?

You typically contribute 12 % of your monthly basic salary towards your PF. However, you can make this contribution to 100% of your basic salary. This top-up amount which you contribute towards PF voluntarily is called VPF – Voluntary Provident Fund. (This is something similar to voluntary contribution to 401K account in USA).

Post your contribution, this is like your regular PF – in terms of rate of interest you’ll get & rules governing it.

However, this all is applicable to you only if you are a salaried employee with PF as part of your salary.

What are the benefits of VPF?

  • Interest rate is same as PF or even higher (some companies offer higher interest rate on this amount, as they are allowed to park money in a trust). Current rate of interest is 8.65% per annum. That is more than what most of the bank fixed deposits & even PPF offer.
  • Tax exemption – You can get income tax exemption on contributed amount, under Section 80C (limit under section 80C is Rs. 150,000 & PF/ VPF is one of the ways you can utilize this)
  • Tax free returns – If withdrawn after certain lock in period (currently, it is 5 years of continuous membership) the amount is tax free (principal as well as interest)
  • You can transfer this with your PF if you change your job. Of late, UAN Universal Account Number( has made this much easier.
  • VPF, like PF carries very low risk, since it is guaranteed by the the government.

What are risks & disadvantages of VPF?

  • There is a lock-in period, so your cash flows will be affected.
  • Returns will be taxed if you withdraw the amount before stipulated period (typically 5 years)
  • Historically equities (including equity mutual funds) have given better rate of returns. So you you may be missing out on those potential returns if you contribute to VPF.

VPF versus Mutual Funds/ ELSS

This is a tricky questions – Would you prefer a tax free, assured returns or potentially higher returns (but with some rick).

Well, it depends upon your risk profile and investment objectives.

If you have a high risk appetite, then VPF may not be right for you (unless you have lot of buffer money!). You may be better off investing money in equities or mutual funds (including SIP/ ELSS)

VPF versus PPF

Public Provident Fund – PPF is another popular tool people use for tax saving (and tax free long tern returns). However the interest rate for PPF is less then VPF (currently at 8% for PPF vis a vis 8.65% for VPF). So, if you are a salaried employee & are reasonably sure that you will be a salaried employee for long term in foreseeable future, you may be better off contributing for to VPF than PPF. Conversely, if you have plans for starting a business or be off-employment (planned/ unplanned!) then it may be a better idea to have PPF. (instead of, or, in addition to VPF)

To sum it up …

Contributing to VPF can be a very good tool to save a bit more and inch closer towards your long term financial goals (and hopefully financial independence or partial financial independence). This is best suited for individuals who are likely to be in salaried job for a reasonable period of time and are aiming primarily for capital protection than capital growth. If you don’t mind riskier assets or are a bit adventurous, then there may be better alternatives.

PS – The interest rate at the time of writing this was 8.55% which was increased to 8.65% soon thereafter. The above content has hence been updated with current interest rate.


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