VPF vs PPF: Which Can Be A Good Bet For Retirement Planning?

More and more working people are dreaming about and contemplating the value of developing retirement savings in recent years. And there is no scarcity of strategies that individuals should consider for retirement income in the large Indian financial sector. That being said, while seeking to concentrate on a particular scheme for that reason, the scarcity could also be daunting. Hence, while choosing an investment plan, it is important to match one's financial requirements against the available choices. Considering the same, Provident Funds (PFs) are optimal if individuals choose an approach that provides assured returns and at the same time ensures ultimate corpus security. The Voluntary Provident Fund (VPF) and the Public Provident Fund (PPF) are both common tax-saving strategies regulated under Section 80C of the Income Tax Act, 1961. There are various points of differentiation while comparing VPF vs. PPF that a person needs to analyse before selecting any of them for their retirement benefits. In this article we have described the same thing by revealing the following.

Voluntary Provident Fund (VPF)

It is an extension of the Employees' Provident Fund (EPF), where an employee contributes a portion of his/her salary voluntarily into his/her Provident Fund account. An individual employed in a company that hires more than 20 people, becomes legally required to hold an EPF account, as per EPF regulations. An employee can make a contribution of 12 per cent (basic pay + dearness allowance) from his or her salary towards EPF account. That being said, as a Voluntary Provident Fund, an individual can opt to contribute an extra amount over and above the compulsory amount. In that case, there is no requirement for the employer to provide any additional amount over and above what is mandatory.

Contributions to EPF are locked-in until the employee retires or is entitled to make a premature withdrawal under a certain rule. Under the Voluntary Provident Fund (VPF) regulations, if employees wish to contribute more than the minimum limit, they can do so. Contributions towards VPF are deposited into the employee's EPF account and there is no upper limit for deposit. The interest rate is currently 8.65 per cent, and it is determined by the Employees' Provident Fund Organisation or EPFO.

Points to consider related to VPF

• There are no regulations effective on the contributions towards VPF. It is another key distinction between PPF and VPF. As a monthly contribution to VPF, an employee can opt to deposit 100 per cent of his or her salary (basic salary + dearness allowance).
• When an employee resigns or retires, the Voluntary Provident Fund stays operational. When they change employers, individuals can opt to transfer their EPF account. Between VPF vs PPF, this is a key point of differentiation. In addition, only under a few circumstances, an employee can withdraw from his or her EPF account prematurely.
• VPF refers to the EEE or Exempt-Exempt-Exempt classification, identical to EPF. Which implies that all contributions rendered to VPF are exempted up to a maximum of Rs.1.5 lakh from taxation u/s 80C of the I-T Act 1961. In addition, the interest received on the balance is exempted from tax along with the maturity amount.

VPF is suitable for

VPF can be considered by employees working in qualifying organisations. It is also prudent to make use of the VPF regulations for all eligible persons. When they make good use of the Section 80C cap, they don't have to hunt for other tax-saving opportunities. It is easy and clear to save taxes through VPF as the contributions for it are withheld directly from the salary of the employees by the employers.

Public Provident Fund (PPF)

Unlike the VPF, it is a government-backed investment plan tailored for all types of individuals i.e. salaried, self-employed, student, retired person and so on. Taxpayers can claim tax benefits of up to Rs 1,50,000 a year by investing in PPF under section 80C. In a year, the minimum contribution of Rs 500 is mandated. One is not allowed to deposit more than Rs 1,50,000 per year. The returns generated under PPF are set and covered by sovereign guarantees. Based on the prevailing rates on government bonds, the Indian government reviews the PPF interest rate per quarter. A critical field of the discrepancy is the VPF vs PPF interest rate. A 7.1 per cent interest rate is currently offered by PPF.

Points related to PPF

• Every Indian citizen is eligible to open a PPF account. That implies that a PPF account can't be opened by NRIs. Likewise, in India, HUFs are not able to open a PPF account.
• The contribution factor is a key point in the VPF vs PPF differentiation. Until maturity, PPF subscribers need to contribute a minimum of Rs.500 per year. Alternatively, Rs.1.5 lakh is the maximum amount that can be invested annually into a PPF account.
• For PPF, the maturity tenure is 15 years. This is another important contrast between the VPF and the PPF. Besides this, after the specified term is over, a PPF subscriber can extend the lock-in duration by a block of 5 years from thereon.
• Under Section 80C of the Income Tax Act 1961, contributions amounting to a limit of Rs.1.5 lakh are annually exempted from tax. In addition, the interest received and the balance withdrawn after the maturity period is tax-free.

PPF is suitable for

If someone is searching for a long-term investment plan, since the lock-in duration is 15 years, they should invest in PPF. PPF can be considered by those citizens who have exceeded their Section 80C cap as it is a government-backed scheme that provides an assured return of 7.1%.

Our take

Both VPF and PPF are backed by the sovereign guarantees that not only offer assured returns but also provide tax benefits. Based on your eligibility criteria both these schemes can be considered for retirement planning. There is a deposit cap of Rs 1.5 lakh in PPF per fiscal year. In VPF, nevertheless, you can pledge up to Rs 1.5 lakh towards your deduction and at the same time, your company can also allocate any amount if it does not surpass 12 per cent of your basic salary+DA. Thus, to that point, for a salaried person, VPF is best. You can spend up to Rs 1.5 lakh if you consider PPF, and the return you receive on that is 7.1 per cent.

Fortunately, you get an 8.65 per cent interest in VPF, which is much higher than PPF. Although PPF is one of the widely considered options in the debt investment field, why not opt for the higher interest rate if you have the option to go for VPF. It's a stronger retirement investment alternative compared to PPF for salaried individuals. But it is also advised that you grasp the provisions of each of these strategies, as well as determine the liquidity requirements and withdrawal restrictions applied to these plans before making a final decision.