Who wouldn’t prefer a saving scheme that ensures corpus security, assured returns along with tax benefits? More and more working class individuals are now contemplating the value of developing a retirement saving. There are ample investment strategies to consider from. Among the most commonly subscribed tax saving investments are the Public Provident Fund (PPF) and Voluntary Provident Fund (VPF). They sound similar in terms of tax benefits, but there are various differences between the two schemes. Given the similarities, it is difficult for investors to conclude as to which investment is a better retirement scheme. Let’s try to understand individually.
In layman terms, VPF is a voluntary contribution made by an employee from her salary into the Provident Fund account. The scheme is an extension of the Employees’ Provident Fund (EPF) where the employer and employee both make certain contributions to the account depending on one’s package. The employee’s contribution is 12 percent of the salary i.e. basic pay plus dearness allowance.
In the VPF, an individual can choose to increase the contribution over and above the mandatory amount. But the employer is not entitled to make any additional contributions. There is no upper limit to the voluntary contributions made by an individual. In case of job change, an individual can transfer their EPF account.
The contributions are locked-in until retirement or if someone plans to prematurely withdraw in accordance with the rules. The contributions earn an interest of 8.65 percent or what is determined by the Employees’ Provident Fund Organisation (EPFO). The interest accumulated and the maturity amount is exempted from tax.
Unlike the VPF, where contribution is voluntary, the PPF subscribers have to mandatorily make a minimum deposit of Rs 500 every year and a maximum of Rs 1.5 lakh can be contributed every year. PPF has maturity tenure of 15 years which can be extended to another 5 years. Contributions of up to Rs 1.5 lakh are exempted under Section 80C and the interest and balance amount at the time of maturity is tax free.
Another major difference is that VPF is for salaried personnel but PPF is a government-backed investment plan which is tailored to benefit all types of individuals including students, self-employed, retired people, among others.