Benefits of PPF Account | VPF vs PPF: Know which is most beneficial in the long term? VPF vs PPF: Know which is most beneficial in the long term?

Retirement planning matters to every individual. This process defines the outline of your golden years and decides how you intend to spend them. But to achieve the desired retirement, it is very important to invest wisely during the working years. There are many investment products available in the market like Mutual Funds, National Pension Scheme (NPS), National Savings Certificate (NSC) etc. But there are two products i.e. Voluntary Provident Fund and Public Provident Fund (PPF) which are much preferred by long term investors. These not only provide assured and attractive returns on investment but also provide income tax deduction benefits. Due to such attractive features, these schemes are preferred by investors who want to build their retirement corpus along with risk-free, guaranteed returns. In this article, we will compare both the schemes to help you make your informed decision.

Voluntary Provident Fund (VPF)

VPF is an extension of Employees’ Provident Fund (EPF). All salaried employees are required to make a mandatory contribution of 12% of their basic salary to EPF and the same amount is also contributed by the employer. Voluntary Provident Fund, as the name suggests, is the voluntary contribution made by the employees to the PF accounts after the ceiling of 12%. This contribution is limited to 100% of Basic Pay and Dearness Allowance. Having said that, it is important to note that there is no obligation or obligation on your employer to contribute to your VPF account.

Public Provident Fund (PPF)

PPF is also a voluntary long term investment scheme. A large corpus can be amassed for retirement by any investor as it earns compound interest. Investment in PPF can be done either in lump sum or in 12 installments (which should not be less than Rs 500/- and the total amount should not exceed Rs 1.5 lakh) during a financial year. Interest is calculated on the minimum balance from the end of the 5th day to the last day of the month. So, if you are investing in installments then you should invest in PPF in the first five days of the month.

Who can open an account?

VPF: Only salaried individuals can open a VPF account in India. Usually it is opened with the EPF account, which you open while starting your job. Account opening is done by your employer’s human resources or finance department.

PPF: All Indian citizens are eligible to open a PPF account. It can be opened by anyone – salaried, businessmen, self-employed and even minors can open this account in authorized banks and post offices. This facility is also being provided to the investors by some big private banks.

investment period

VPF: You can invest in VPF till your retirement age. But, the lock-in period of 5 years has been fixed. Essentially this means that when you open your VPF account, you cannot terminate or close it before the completion of the base period of 5 years. If you change your job, you can transfer your VPF account from one employer to another.

PPF: The tenure of PPF account is 15 years. But you can extend it for a block of 5 years, and it can be continued for as many blocks as you wish.

Rate of interest

VPF: The rate of interest on VPF account, which is announced annually by the government, is the same as the rate of interest on EPF. The rate of interest for 2020-21 is 8.5%.

PPF: The government fixes the interest rates for small savings schemes every quarter. The rate of interest on PPF for the July-September quarter is 7.1%.

investment amount

VPF:As a percentage of income, the monthly contribution can range from 12% of basic pay to 100% of basic pay and dearness allowance. As for the actual limit, you can invest as per your wish; There is no maximum permissible limit in VPF. But, investments after a certain limit are not tax free.

PPF: You can deposit a minimum of Rs 500/- and a maximum of Rs 1.5 lakh during a financial year.

tax savings

VPF: An annual investment of Rs 1.5 lakh in a VPF account can be used to avail tax deductions under Section 80-C of the Income Tax Act. You can also invest more than Rs 1.5 lakh, but the additional investment will not be considered for tax deduction under section 80C. In addition, interest earned on contribution of Rs 2.5 lakh (both on behalf of employee and employer) will remain tax free. But, interest earned on investment amount after this limit will be taxed as interest so earned is treated as income. Further, interest earned on annual contribution up to Rs.5 lakh will be treated as tax-free if the contribution is made by the sole employee. If the employee is the sole contributor and the amount invested exceeds Rs 5 lakh, then interest earned on investments made beyond this limit of Rs 5 lakh will be taxed. In addition, if the rate of interest exceeds 9.5% in a financial year, the additional interest earned will also be charged to tax.

PPF: The maximum amount invested in PPF account up to Rs 1.5 lakh per annum can be used to avail tax deductions under section 80-C of Income Tax. The interest earned is also tax free. Once the period is over, the total accumulated amount along with interest is received by the investor as tax-free amount.

Withdrawal

VPF: You can withdraw the entire amount after retirement or if you are unemployed for more than two months. You can also do partial withdrawal in the form of a loan for specific purposes such as marriage, medical emergencies, construction of a house or purchase of a house. But, it is important to note here that if the partial withdrawal is done before the base period of 5 years, then the accumulated amount is taxed.

PPF: The investor can withdraw the total amount on the completion of the period of 15 years. Partial withdrawal is allowed only after completion of 6 years. This means that you can do partial withdrawals from the 7th year onwards and you are allowed to do so only once in a financial year. After completion of three years, you can take loan against PPF investment. Premature withdrawal is also allowed to the account holder. But kept in PPF at the end of the fourth year. No more than 50% of the total amount can be withdrawn. The amount withdrawn is taxed.

Which scheme is better for you?

Both PPF and VPF schemes are low risk investment options and prove to be better for investors seeking assured returns. Your decision to choose either of the two depends on your investment tenure and return expectations. Having said that, it is also important to note that the rate of interest on VPF is 8.5% and that on PPF is 7.1%, but the tax provisions are different on both the schemes.

High contribution and high interest in VPF can quickly add up to huge retirement corpus. The rate of return on PPF is fixed every quarter. Therefore, any increase in the interest rate will increase your tax-free return, and a decrease in interest will reduce your returns. If your financial goals fall within a period of 15-20 years, such as your child’s higher education or marriage, then this is a great investment tool.

Individuals who fall in the higher income bracket can invest in both VPF and PPF to earn tax-free interest up to a certain limit. It must be noted here that both these investments are not very liquid as they are aimed at achieving long-term goals. PPF is an efficient investment option for self-employed individuals for wealth creation and tax saving. For retirement, you can also consider investing a portion of your savings in equities, which makes it possible for you to get far higher returns than inflation in the future.

(The author of this article is Adil Shetty, CEO, BankBazaar.com)
(Disclaimer: This information is being given on the basis of expert reports. Markets are subject to risks, so take your own advice before investing.) (This article is written for informational purposes only. It is for investment purposes only.) should not be construed as financial or other advice)