VPF is only partly tax-free. Your contribution earns a deduction only under the old tax regime. Interest is tax-free only on the first ₹2.5 lakh you contribute in a financial year, counting your 12% EPF and your VPF together. The money is tax-free on withdrawal only after five years of continuous service. This guide explains each rule with worked numbers, including how EPFO taxes the interest on the excess, how TDS works and how to report it in your return. Rules are as of October 2026, under the Income-tax Act, 2025.
Is VPF taxable? The short answer
| Stage | Old tax regime | New tax regime (default) |
|---|---|---|
| Your contribution (12% EPF + VPF) | Deduction within the ₹1.5 lakh limit of Section 123 (formerly Section 80C) | No deduction |
| Interest on your contributions up to ₹2.5 lakh a year | Tax-free | Tax-free |
| Interest on your contributions above ₹2.5 lakh a year | Taxable every year at your slab rate | Taxable every year at your slab rate |
| Withdrawal after 5 years of continuous service | Tax-free | Tax-free |
| Withdrawal before 5 years | Taxable, with TDS | Taxable, with TDS |
So VPF is not "fully EEE" (exempt at every stage), as many articles still say. The ₹2.5 lakh rule has applied since FY 2021-22, and the Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026, carries it forward unchanged.
How the ₹2.5 lakh rule works
The limit applies to the amount you contribute, not to the interest. It counts only your own contributions in a financial year: the compulsory 12% plus any VPF. The employer's share does not count.
- ₹2.5 lakh applies where your employer also contributes, which is the normal EPF case.
- ₹5 lakh applies where there is no employer contribution, as with the General Provident Fund (GPF) for many government employees.
To apply the rule, EPFO (or your company's PF trust) splits your account in two:
- Non-taxable account: your balance as on 31 March 2021, your contributions up to the limit each year, and the interest on both.
- Taxable account: your contributions above the limit each year, and all interest earned on them in later years too.
Interest on the taxable account is taxed every year as "income from other sources", at your slab rate, in both tax regimes.
At what salary do you cross the limit?
Your yearly contribution is 12 × your monthly PF wage × (12% + your VPF %). You cross ₹2.5 lakh when your monthly PF wage (Basic + DA as shown on your payslip) is above these figures:
| Your VPF rate | Total employee contribution | You cross ₹2.5 lakh above a monthly PF wage of |
|---|---|---|
| 0% (EPF only) | 12% | ₹1,73,611 |
| 5% | 17% | ₹1,22,549 |
| 10% | 22% | ₹94,697 |
| 20% | 32% | ₹65,104 |
| 38% | 50% | ₹41,667 |
| 88% | 100% | ₹20,833 |
This assumes your 12% is calculated on your full PF wage. If your employer deducts 12% only on the ₹25,000 ceiling, your compulsory part is ₹3,000 a month and you can add correspondingly more VPF before crossing the limit.
Worked example: how much interest becomes taxable
Take a monthly PF wage of ₹1,50,000. The employee contributes 12% (₹18,000) plus 5% VPF (₹7,500), so ₹25,500 a month or ₹3,06,000 a year. That is ₹56,000 over the limit every year.
By December the employee has contributed ₹2,29,500. January takes the total to ₹2,55,000. So ₹5,000 of January's contribution, and all of February's and March's, go to the taxable account. Interest is calculated on the monthly running balance at 8.25% (the FY 2025-26 rate) and credited at the end of the year:
| Year | Contribution added to taxable account | Taxable interest for the year | TDS by EPFO at 10% (PAN linked) | Taxable account at year end |
|---|---|---|---|---|
| 1 | ₹56,000 | ₹244 | ₹24 | ₹56,244 |
| 2 | ₹56,000 | ₹4,884 | ₹488 | ₹1,17,128 |
| 3 | ₹56,000 | ₹9,907 | ₹991 | ₹1,83,035 |
Two things stand out:
- The first year looks harmless. The excess arrives in the last three months, so it earns little interest that year.
- The tax grows every year. The taxable account keeps earning taxable interest on everything already in it, so the amount taxed rises even if your contributions stay the same.
EPFO's actual figures can differ by a few rupees because of remittance dates and rounding. To project your own numbers, use the VPF calculator, which flags the ₹2.5 lakh limit, or the VPF calculator in Excel, which tracks the taxable account month by month.
TDS on taxable PF interest
EPFO, or your PF trust, deducts TDS on the taxable interest when it credits interest for the year:
- 10% if your PAN is linked to your UAN.
- 20% if it is not. Link your PAN on the EPFO member portal to avoid the higher rate.
TDS at 10% is not the final tax. The interest is added to your income and taxed at your slab rate. If you are in the 30% slab, you pay the difference when you file your return. If your income is below the taxable limit, the TDS comes back to you as a refund.
How to report taxable PF interest in your return
- Find the amount. Check your EPFO passbook and your Annual Information Statement (AIS) on the income tax portal, which shows the TDS EPFO deducted.
- Report it under "income from other sources" for the year the interest was credited, in either tax regime.
- Claim the TDS credit that EPFO deducted, as shown in your Form 26AS and AIS.
The taxable interest is taxed year by year, as it is credited. Use the income tax calculator to see the tax on it at your slab.
Tax when you withdraw VPF
VPF follows EPF withdrawal rules, so the five-year test applies to your whole PF balance.
After five years of continuous service: the withdrawal is tax-free. Service with earlier employers counts if you transferred your PF to each new employer rather than withdrawing it. The five years are counted on your service, not from the day you started VPF.
Before five years: the withdrawal is taxable:
- the employer's contribution and the interest on it are taxed as salary;
- the interest on your own contribution is taxed as income from other sources;
- any deduction you claimed earlier on your own contribution under the old regime is reversed and taxed.
EPFO deducts TDS at 10% if the amount is ₹50,000 or more and your PAN is linked, or 20% without PAN. If your total income is below the taxable limit, you can submit a self-declaration with your claim so that no TDS is deducted.
Exceptions: a withdrawal before five years stays tax-free if your employment ended because of ill health, closure of the employer's business, or another cause beyond your control.
When you change jobs, transfer your PF instead of withdrawing it. That keeps your service continuous for the five-year test.
The employer-side limit: ₹7.5 lakh
A separate rule applies to your employer's contributions. If your employer's contributions to PF, NPS and superannuation funds together exceed ₹7.5 lakh in a year, the excess, and the income earned on it, is taxed as a perquisite in your salary.
VPF does not affect this, because VPF is your own money and employers do not have to match it. It mainly matters for high earners whose employer contributes 12% on a large basic pay.
Is VPF still worth it above ₹2.5 lakh?
Interest on the taxable account still earns the EPF rate. It is simply taxed. At 8.25%:
- in the 30% slab, with 4% cess (31.2% in all), the post-tax return is about 5.7%;
- in the 20% slab, with cess (20.8%), it is about 6.5%.
Compare that with PPF, which pays 7.1% for October–December 2026 with fully tax-free interest, up to ₹1.5 lakh a year. For many people in the 30% slab, money above the ₹2.5 lakh limit earns more after tax in PPF than in VPF.
The VPF vs PPF comparison covers the other differences, such as liquidity and lock-in. Before you change your VPF rate, check the effect on your take-home pay.
Common mistakes about VPF tax
- "VPF is fully tax-free (EEE)." Not since FY 2021-22. Interest on contributions above ₹2.5 lakh a year is taxable, and the new regime gives no deduction on contributions.
- "The ₹2.5 lakh limit is on interest." It is on your yearly contribution. The interest earned on the excess is what gets taxed.
- "The employer's share counts towards ₹2.5 lakh." It does not. Only your 12% and your VPF count.
- "The five years start when you open VPF." They count your continuous service. There is no separate VPF account or VPF start date.
- "TDS settles the tax." TDS is 10%. If your slab is higher, you owe the balance when you file.
Frequently asked questions
Is VPF taxable under the new tax regime?
Your contribution gets no deduction under the new regime. The interest rules are the same in both regimes: interest is tax-free on your contributions up to ₹2.5 lakh a year and taxable above that. Withdrawals after five years of continuous service are tax-free in both.
Does the ₹2.5 lakh limit include my 12% EPF?
Yes. It counts your 12% compulsory contribution and your VPF together for the financial year. It does not count the employer's contribution.
Why is the limit ₹5 lakh for some people?
The ₹5 lakh limit applies where there is no employer contribution to the fund, which is the case for the General Provident Fund of many government employees.
Is the interest on my balance before April 2021 taxable?
No. Your balance as on 31 March 2021 sits in the non-taxable account, and the interest on it stays tax-free.
Who deducts TDS on taxable PF interest?
EPFO, or your company's PF trust if it runs one, not your employer's payroll. It deducts 10% if your PAN is linked to your UAN and 20% if not.
Can I claim VPF under Section 80C in 2026?
From 1 April 2026, the deduction is under Section 123 of the Income-tax Act, 2025, which replaced Section 80C. The limit is still ₹1.5 lakh in total with other eligible investments, and it is available only in the old regime.
Related guides on HR Calcy
- Voluntary Provident Fund (VPF): rules, limit, tax and withdrawal
- VPF calculator with the ₹2.5 lakh tax check
- VPF calculator in Excel with taxable-interest tracking
Sources
- PIB, Ministry of Labour & Employment: CBT recommends 8.25% interest for FY 2025-26 (2 March 2026)
- Employees' Provident Fund Organisation (official website)
Rules are as of 20 October 2026, under the Income-tax Act, 2025. This guide is general information, not tax advice. For your own return, check the figures in your EPFO passbook and AIS, or consult a tax professional.