If you are a salaried individual and invest in the Public Provident Fund (PPF) to save tax under Section 80C of the Income Tax Act, 1961, you may be overlooking the Voluntary Provident Fund (VPF), whose returns beat that of the PPF, provide the same tax benefit, and come with the safety associated with a government investment scheme.
Sample this. An investment in the PPF will fetch you a return of 7.6% at present while parking your money in the VPF will fetch you a return of 8.55%, a difference of almost 1 percentage point. The VPF offers a higher interest rate because it always matches the Employees Provident Fund (EPF) interest rate, which is mostly a notch higher than the PPF.
A debt instrument, the VPF is a safe investment because it is backed by the government.
Here are 3 reasons to prefer the VPF over the PPF:
1. VPF provides a better return than PPF
The VPF yields the same interest rate as the EPF. Interest rates of all types of provident funds keep changing from time to time. While PPF rates are revised quarterly, VPF/EPF rates are revised annually. An analysis of interest rates of the VPF/EPF and the PPF shows the former has always been higher.
■2017-18: The VPF/EPF interest rate was 8.55% while the PPF rate varied between 7.6% and 7.9%
■2016-17: The VPF/EPF interest rate was 8.65% while the PPF rate varied between 8% and 8.1%
■2015-16: The VPF/EPF interest rate was 8.8% while the PPF rate was 8.7%
■2014-15: The VPF/EPF interest rate was 8.75% while the PPF rate was 8.7%
■2013-14: The VPF/EPF interest rate was 8.75% while the PPF rate was 8.7%
The difference between the two has increased over the years in favour of the VPF/EPF, which makes it a better choice.
2. Investing in VPF is easy
For the PPF you will either have to walk into a post office once in a while or operate a PPF account online through a designated bank. The VPF is easier as once you instruct your office accounts department you don’t have to do anything till it’s time you change your job. A fixed amount, decided by you, will be deducted from your salary every month. This ensures investment discipline while making savings easy.
Even when you change a job, your EPF/VPF account is transferred using a single UAN of EPFO.
3. VPF gives you the same tax benefits as PPF
Contribution towards the VPF is eligible for full tax deduction under Section 80C. Just like the PPF, it enjoys the highest EEE (exempt-exempt-exempt) category of tax deduction. So your investment in the VPF is tax free and so is the interest earned as well as the entire corpus at the time of withdrawal.
There is a small clause, however. VPF withdrawals are tax exempt only if one has been in service for more than 5 years.
How to start investing in VPF
Just ask your office’s accounts department to deduct a fixed percentage from your basic salary as VPF every year. They may ask you to fill a form or just drop an email agreeing to the deduction.
Under EPF, you contribute 12% of your basic pay and dearness allowance (DA) as a mandatory requirement but VPF allows you to choose the amount subject to a maximum of 100% of basic salary and DA. Keep in mind that your total contribution under Section 80C tax saving investments, which includes EPF, VPF, PPF, ELSS mutual fund, National Savings Certificate, etc, cannot cross the current limit of Rs 150,000 in a single financial year.
Your VPF investment will reflect on EPFO website.
What is the lock-in period for the VPF and when can you withdraw money?
The VPF has the same lock-in period as the EPF — on resignation or within 2 months of unemployment. Partial withdrawal is allowed, but the withdrawal amount is tax-free only if the account is at least 5 years old.