Investing in the right financial instrument is vital to increase one’s earning potential. While a good investment is more about balancing risks and rewards, the amount of return one gets depends on how much risk one is willing to take. However, not all investments assure high returns.
With multiple investment options, it becomes more difficult to zero in on the most suitable scheme. PF schemes like EPF (Employees’ Provident Fund), NPS (National Pension Scheme), PPF (Public Provident Fund), and VPF (Voluntary Provident Fund) are some of the excellent options for investments as well as tax benefits.
Who can invest in Public Provident Fund(PPF)?
Any individual – a salaried individual, a student, self-employed, or a retired person—any citizen living in India can open a PPF account. But, the non-resident Indians are not qualified to open PPF accounts. However, a citizen of India who becomes an NRI after opening an account is eligible to hold the account until maturity. As per the law, an individual is allowed to open only one PPF account.
How does a PPF account work?
PPF is one of the most popular investment schemes. It is a long-term investment guaranteed by the government with a lock-in period of 15 years, assuring returns and fund protection. It comes under the Exempt- Exempt-Exempt regime which means that the contribution to the fund, the interest earned, and the redemption- all are exempt from Income Tax.
- Applicability
Anyone can open a PPF account; it has no relation with the employer. Individuals can open a PPF account at post offices, nationalised banks, and a majority of private banks. Some banks even permit banking users to open a PPF account online. Even a minor is eligible to open a PPF account along with a guardian. - Contribution
It is fixed-income security where one has to make a minimum investment of Rs. 500 and a maximum investment of Rs. 1,50,000 in a year. Failing to deposit the minimum amount of Rs. 500 on the completion of the financial year leads to the account being designated as inactive. The account can be revived by paying a penalty of Rs. 50 for every financial year the account has been inactive. However, it is also not compulsory to contribute to PPF. - Returns
Currently , PPF accounts offer an interest rate of 7.10 per cent. This return rate is for the quarter ending March 2021. The government sets the interest rate every quarter. Investment in PPF allows taxpayers to seek tax exemptions of up to Rs. 1,50,000 in a year.
What is a Voluntary Provident Fund (VPF) Account?
An extension of the Employees’ Provident Fund (EPF), the Voluntary Provident Fund account is another investment option that helps a salaried individual to plan and save for their retirement. Employees working in registered companies can willingly contribute any percentage of their salary to their PF account.
How does a VPF account work?
The contribution for VPF does not include the compulsory deduction of 12 per cent of the basic salary. The employers have the right to withdraw funds from VPF accounts as and when required to meet the financial expenses. However, if an employee withdraws funds from a VPF before 5 years, the amount will be taxed.
- Applicability
No employer can force an employee to contribute to the VPF. It can be accessed only by salaried individuals and is similar to EPF. It allows an extension where an employee can contribute even more than the stated limit, but the employer’s contribution will remain the same. For VPF, one has to consult their organisation’s HR department to apply for the same. - Contribution
For VPF, there is no maximum or minimum contribution. However, the contribution is restricted to 100 per cent of the salary plus the dearness allowance. Under section 80C of the Income-tax Act, 1961, VPF offers tax exemption up to Rs. 1.5 lakh in a financial year. PPF also gives this exemption. In the budget for 2021, there has been a proposal to reduce the deduction on return received on VPF. - Returns
A VPF account’s interest is the same as an EPF account, which is 8.5 per cent for the fiscal year 2020-21.
VPF vs PPF – Where to Invest?
We have compared the features of both the investment options, so that the investment decision becomes easier for you.
| Features | Public Provident Fund | Voluntary Provident Fund |
| Nature | Savings scheme | Retirement cum Savings scheme |
| Eligibility | Any citizen living in India | Employed individuals |
| Investment duration | 15 years | Until one retires or resigns, whichever is earlier |
| Extension beyond maturity | Can be extended in 5-year blocks | No extension |
| Tax benefit | As per section 80 C | As per section 80 C |
| Withdrawal | 15 years | As and when required |
| Rate of interest | Lower (currently 7.1 per cent) | Higher (currently 8.5 per cent) |
| Loan | 50 per cent after 6 years | Partial withdrawals are allowed |
Conclusion
Both PPF and VPF have their own merits and demerits. If the savings are for retirement, then one should consider VPF. If there are long-term goals like children’s marriage or higher education and medical issues, and so on, then opt for PPF. In the case of a higher tax slab rate and higher contribution for tax-free gains, it is advisable to consider both alternatives at a time.
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