EPF: What is the maximum one can invest in VVF for tax-free interest income?

EPF (Employees Provident Fund) will get 8.1 percent interest in the financial year 2021-22. This is 0.40 percent less than the financial year 2020-21. Despite this, it is higher than other instruments with fixed returns.

The government has announced the interest rate for the financial year 2021-22 for EPF (Employees Provident Fund). During this, EPF members will get 8.1 percent interest. This is 0.40 percent less than the financial year 2020-21. Despite this, it is higher than other instruments with fixed returns.

Many employees may consider increasing their EPF contribution through VPF (Voluntary Provident Fund) given the attractive interest rate of EPF. Doing so will increase your return on savings. Also, your interest earned on contribution to EPF and VPF will be tax-free.

However, it has a condition. This condition is effective from 1st April, 2021. It states that the interest amount earned from EPF will be taxable when the employee’s own contribution crosses the prescribed limit. This limit also includes the contribution made by the employee to the VPF.

Thus, if an employee’s EPF and VPF contribution exceeds Rs 2.5 lakh in a financial year, the interest earned on the additional amount will be taxable. A separate EPF account has to be opened for the interest earned on the additional contribution.

Now the question is, how much should you invest through VPF so that your EPF and EPF interest are not taxed? According to the rules, the total EPF contribution through EPF and VPF should not exceed 2.5 lakhs in a financial year. But, the right answer to this question depends on how much amount you mandatorily contribute to EPF every month.

There are two ways to know your mandatory EPF contribution:

1. You can check mandatory EPF contribution from your salary slip.

2. You can calculate your EPF contribution by calculating 12% of your basic salary.

Once you know your mandatory EPF contribution amount, you will have to deduct it from Rs 2.5 lakh. With this you will know that the maximum contribution you can make in EPF through VPF.

We can understand this with the help of an example. Suppose your monthly basic salary is Rs 30,000. Its mandatory EPF contribution will be Rs 3,600 (12% of 30,000). Your annual EPF contribution will be Rs 43,000 (3600X12). In this way, you can invest a maximum of Rs 2,06,800 (2,50,000-43,200) in VPF in a financial year. This is the maximum amount that you can invest to get tax-free interest amount.