As per the latest EPF rules, if the employee’s own total contribution exceeds Rs 2.5 lakh in a financial year then interest on EPF above Rs 2.5 lakh will be taxable. How much? Only the interest earned on the amount that is in excess of Rs 2.5 lakh. So let’s say your contribution is Rs 3 lakh, then the interest on the amount of Rs 2.5 lakh, which is Rs 50,000 in this case, will be taxed.
So that brings us to the question.
How much can you invest in VPF so that your total contribution from EPF + VPF does not exceed Rs 2.5 lakh and the interest earned remains tax-free?
The answer depends on how much is your existing ongoing mandatory contribution to the EPF currently.
Suppose your monthly EPF contribution is Rs 10,000. Your employer also contributes about Rs 9000 per month. But for the new EPF taxation rule, we are only concerned about the employee’s contribution. That is, your contribution of Rs 10,000 monthly or Rs 1.2 lakh annually.
The limit for tax-free interest contribution is Rs 2.5 lakh. Since you are already contributing Rs 1.2 lakh, that leaves about Rs 1.3 lakh more that you can use. This translates to Rs 10,833 per month that you can invest extra via VPF and into EPF to continue to earn tax-free EPF returns and stay below the overall Rs 2.5 lakh limit as per the latest VPF interest rates which are the same as the historical EPF rates.
What about other EPF scenarios?
Here is a ready reckoner to help you.
- If you currently contribute Rs 2000 monthly in EPF, then you can additionally contribute Rs 18,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 3000 monthly in EPF, then you can additionally contribute Rs 17,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 4000 monthly in EPF, then you can additionally contribute Rs 16,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 5000 monthly in EPF, then you can additionally contribute Rs 15,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 6000 monthly in EPF, then you can additionally contribute Rs 14,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 7000 monthly in EPF, then you can additionally contribute Rs 13,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 8000 monthly in EPF, then you can additionally contribute Rs 12,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 9000 monthly in EPF, then you can additionally contribute Rs 11,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 10,000 monthly in EPF, then you can additionally contribute Rs 10,833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 11,000 monthly in EPF, then you can additionally contribute Rs 9833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 12,000 monthly in EPF, then you can additionally contribute Rs 8833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 13,000 monthly in EPF, then you can additionally contribute Rs 7833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 14,000 monthly in EPF, then you can additionally contribute Rs 6833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 15,000 monthly in EPF, then you can additionally contribute Rs 5833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 16,000 monthly in EPF, then you can additionally contribute Rs 4833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 17,000 monthly in EPF, then you can additionally contribute Rs 3833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 18,000 monthly in EPF, then you can additionally contribute Rs 2833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 19,000 monthly in EPF, then you can additionally contribute Rs 1833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 20,000 monthly in EPF, then you can additionally contribute Rs 833 monthly via VPF to remain below the limit of Rs 2.5 lakh per financial year and continue to earn tax-free interest on your EPF + VPF contributions.
- If you currently contribute Rs 20,833 monthly in EPF, then you have already exhausted the Rs 2.5 lakh annual limit. You cannot contribute anything more via VPF if you want to keep things tax-free interest on your EPF + VPF contributions.
So these are the various maximum monthly VPF amount that you can contribute while ensuring that interest earned from EPF remains tax-exempt in your hands.
But please note that as your salary increases every year, your EPF contribution will also increase. So the required VPF contribution to keep overall contributions below Rs 2.5 lakh every financial year will also reduce proportionately.
By the way, only EPF is not enough for your retirement.
So that was about the maximum investment in VPF for tax free interest on the EPF account that you need to make every month in India (2023)