voluntary provident fund: More savings in the offing: VPF limit for tax-free interest may be hiked

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NEW DELHI: The government could raise the ceiling on contributions with taxfree interest to the voluntary provident fund (VPF) under the Employees’ Provident Fund Organisation (EPFO) from the current Rs 2.5 lakh. Beyond this, interest earned is currently taxable.

The ministry of labour and employment is examining the issue and is likely to take it up with the finance ministry during FY26 budget discussions, people aware of the matter said.

The move is aimed at encouraging the lower-middle and middle income salaried classes to save more via EPFO and enable them to build a reasonable retirement kitty. The FY22 budget imposed a Rs 2.5 lakh ceiling on voluntary contribution, above which the interest accrued is taxed. The move was targeted at high-income employees using the facility to earn tax-free interest exceeding that on bank or fixed deposits.

Typically, VPF comes in the exempt-exempt-exempt tax category. This implies that contributions, interest as well as maturity proceeds all are tax-exempt.

Perceived Misuse

EPFO has been crediting interest in excess of 8% since FY78. It touched a high of 12% in FY90 and remained at that level for 11 years until fiscal year 2000. The interest rate on PF accumulation was 8.10% for FY22, 8.15% for FY23 and 8.25% for FY24.

Under the existing Employees’ Provident Funds & Miscellaneous Provisions Act, there is no cap on VPF contributions to the PF account—it can go up to 100% of basic salary and dearness allowance.The Centre sought to correct what was perceived as misuse of this by high-income earners, restricting the tax-free interest income earned to voluntary contributions of Rs 2.5 lakh per annum. EPFO has an average 70 million monthly contributors, over 7.5 million pensioners and a corpus of over Rs 20 lakh crore.



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