PPF
PPF vs VPF: Unlocking the best investment for your future
Investing wisely is crucial for financial stability and growth. In India, both the Public Provident Fund (PPF) and the Voluntary Provident Fund (VPF) are popular investment options offering attractive benefits. Understanding the differences between PPF vs VPF is essential to determine which option aligns best with your financial goals and investment strategy.
Voluntary Provident Fund: Overview
The Employee Provident Fund (EPF) is a mandatory retirement savings scheme for salaried employees in India, applicable to any company with 20 or more employees. According to this scheme, both the employer and employee contribute a portion of the employee's monthly salary, generally 12% of the basic salary and dearness allowance, to the EPF account. Over time, these contributions accumulate with interest, creating a substantial retirement corpus for the employee. Voluntary Provident Fund is an option available to EPF subscribers, under which employees can contribute an additional amount to their EPF account. The maximum contribution allowed is up to 100% of the basic salary and dearness allowance. But employer does not contribute to VPF.
Public Provident Fund: Overview
The Public Provident Fund (PPF) is a long-term investment option backed by the Government of India, designed to encourage savings among individuals. It offers attractive interest rates and tax benefits, making it a preferred choice for many. PPF accounts can be opened by any Indian citizen, including salaried and non-salaried individuals.
Differences between PPF and VPF
When comparing VPF vs PPF, it’s essential to understand their unique characteristics to make an informed investment decision. Here’s a quick overview of their key differences:
Applicability
- PPF: Available to all Indian citizens living in India, regardless of their employment status.
- VPF: Only salaried employees who are already contributing to the EPF can opt for it
Contribution
- PPF: Minimum annual contribution of ₹500 and a maximum of ₹1.5 lakh per financial year.
- VPF: Employees can contribute up to 100% of their basic salary and dearness allowance over and above the mandatory 12% EPF contribution.
Investment duration
- PPF: Lock-in period of 15 years, with the option to extend in blocks of 5 years.
- VPF: Contributions to EPF can be made until retirement or when the employee leaves the job. If you switch jobs, the account can also be transferred to another employer. If you opt for VPF, you cannot discontinue it before the end of 5 years.
Tax benefits
- PPF: Contributions are eligible for tax deduction under Section 80C of the Income Tax Act subject to a threshold of ₹1.5 lakh. The PPF interest and maturity amount are also tax-exempt.
- VPF: Contributions qualify for deduction under Section 80C, subject to a threshold of ₹1.5 lakh. and the interest earned is tax-exempt up to ₹2.5 lakh of annual contribution. However, any withdrawal before completing 5 years is taxable.
Loan facility
- PPF: Loans can be availed from the 3rd to the 6th year of opening the account, up to 25% of the balance at the end of the 2nd preceding year.
- VPF: VPF regulations permit partial withdrawals from the Voluntary Provident Fund in the form of loans. Typically, upon retirement or resignation, individuals receive the complete accumulated amount in their EPF account. In the unfortunate event of an untimely demise, the funds can be released and disbursed to the nominated beneficiary. Additionally, in specific circumstances, it is possible to withdraw the entire accumulated corpus from the VPF. This provides significant liquidity options for various financial exigencies.
Eligibility
- PPF: Any Indian citizen living in India can open a PPF account. However, NRIs and Hindu Undivided Families (HUFs) cannot open a PPF account in India.
- VPF: Only available to salaried individuals who are part of the EPF scheme.
Premature withdrawals
- PPF: Partial withdrawals are allowed after the 7th year.
- VPF: Partial withdrawals are permitted under specific conditions, such as medical emergencies, home purchase, or education. However, if an employee withdraws funds from a VPF account before the account completes 5 years, the amount will be taxed.
Maturity period
- PPF: Matures after 15 years, extendable by 5-year blocks.
- VPF: A Voluntary Provident Fund (VPF) stays active until you resign or retire. When you switch jobs, you can transfer your EPF account to the new employer.
Interest rate
- PPF: Offers a fixed interest rate, revised quarterly by the Government of India.
- VPF: Since it is deposited into the same account as the EPF, they have similar interest rates. This rate is determined by the Employees’ Provident Fund Organisation (EPFO).
Which one to choose: VPF or PPF?
When deciding between PPF or VPF which is better, consider your employment status, financial goals, and risk appetite.
- Choose PPF if:
- You seek a long-term, low-risk investment.
- You are non-salaried and looking to build a sizeable retirement corpus
- You want tax-free interest and flexible extension options.
- You are a salaried employee looking to maximise your retirement savings.
- You prefer higher interest rates associated with EPF.
- You are comfortable with limited liquidity until retirement.
Choose VPF if:
Also Read: Six reasons to invest in Public Provident Fund now!
For salaried individuals, combining both PPF and VPF can provide a balanced approach to savings, offering stability through PPF and higher returns through VPF.
To open your PPF account, you can proceed online with just your Aadhaar number or visit any Axis Bank branch. You'll need to submit a filled application form (Form A) along with your KYC documents and an initial contribution of at least ₹500. Required documents include a passport-size photograph, address proof, identity proof, and a birth certificate if the account is for a minor.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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