Both VPF and PPF carry sovereign guarantee and hence, there is no difference when it comes to risk. Both are considered to be safe fixed income investment options. The decision to invest should be based on one’s goal and time horizon.
When it comes to safe fixed income investment options, investors often face a dilemma as whether they should invest in the Voluntary Provident Fund (VPF) or the Public Provident Fund (PPF). Though both carry the same suffix, Provident Fund, and offer attractive returns, they differ in aspects such as eligibility, investment period, return, liquidity options, tax benefits etc. Here is how you can decide which option works best for you.
Who can invest?
VPF is an extension of the Employees’ Provident Fund (EPF). Only those salaried employees who have an active EPF account and regularly contribute towards EPF can put money in VPF. As the name suggests, it is a voluntary contribution which is over and above the statutory EPF contribution. On the other hand, the option to invest in PPF is available to everyone. Even a minor can open a PPF account along with a guardian.
Which gives higher interest rate?
The current rate offered on PPF is 7.1% for the quarter ending March 2021 (the government sets the interest rate every quarter). The interest rate for EPF is yet to be declared for the current financial year 2020-21. For the financial year 2019-20, the interest rate on EPF was set at 8.5%.
Going by the historical interest rates offered by both PPF and VPF, the chances of earning a higher interest rate is better with the latter. There have only been few instances where the interest rate offered by PPF was higher than VPF (see graph).
Which one offers higher tax savings?
When it comes to tax deduction benefit on the investment amount, just like EPF, VPF also offers deduction under section 80C of the Income-tax Act, 1961 up to Rs 1.5 lakh in a given financial year. The PPF, too, offers this deduction.
However, the tax treatment of return earned on these two products are different. For PPF, the entire return earned is exempted from income tax, however, one can not invest more than Rs 1.5 lakh each year.
Budget 2021 has a proposal to limit the exemption on return earned on VPF. As per the proposal, if the investment in VPF and EPF put together is above Rs 2.5 lakh in a financial year, the returns earned on the contribution above Rs 2.5 lakh will not be exempted from tax.
Minimum and maximum investment
Once you open a PFF account, you have to invest a minimum of Rs 500 each financial year while the maximum investment amount can be Rs 1.5 lakh in a year. Failure to deposit the minimum amount of Rs 500 per financial year leads to the PPF account being designated ‘inactive’.
For VPF, there is no such limitation of minimum or maximum investment. However, the maximum investment in EPF and VPF together is limited to 100% of one’s basic salary and dearness allowance.
|Criteria||Voluntary Provident Fund||Public Provident Fund|
|Interest Rate||8.50% (2019-20)||7.1% (Quarter ending March 2021)|
|Safety||Backed by government||Backed by government|
|Period of investment||Till superannuation at the age 58 years, with exceptions||15 years|
|Extension allowed||No||Yes, for a block of 5 years|
|Who is eligible||Salaried employee who are EPF subscribers.||Everyone|
|Minimum investment||No limit||Rs 500 per financial year|
|Maximum investment||Up to 100% of basic salary including the EPF contribution||Rs 1.5 lakh per financial year|
|Exemption on returns||Limited to total contribution of Rs 2.5 lakh each financial year including EPF||Yes, but contribution limited to Rs 1.5 lakh per financial year|
|Premature partial withdrawal||Yes, for specific purposes, just like EPF||After 5 years from the end of financial year of beginning of investment|
For PPF, the period of investment is 15 years. It can be extended for a block for five years any number of times. VPF, on the other hand, is considered as saving for retirement so all the withdrawal rules of EPF apply for the VPF as well. You can withdraw your full EPF amount after superannuation. For claiming final EPF settlement, one has to retire from service after attaining 55 years of age.
Premature withdrawal and loan options
PPF allows partial withdrawal option after five years from the end of the financial year in which the first investment is made. You can also get a loan against your PPF balance between three years and six years from the start of your investment.
The full VPF amount can be withdrawn in case of unemployment of more than two months. You also get the partial withdrawal option for many specific purposes such as medical emergency, construction or purchase of new house, renovation of house, repayment of home loan and wedding.
How to open an account?
PPF account can be opened at designated branches of the Post Office and with select banks. Many banks now have the facility to open a PPF account online where the investments can also be made online. For VPF you need to consult the HR department of your organisation and apply for the same.
Where should you invest?
A good investment option is one that gives you the highest return at the lowest risk. Both VPF and PPF carry sovereign guarantee and hence, there is no difference when it comes to risk. Both are considered to be safe fixed income investment options. The decision to invest should be based on one’s goal and time horizon.
Both the VPF and PPF suit long-term goals.
If your goal is saving for retirement, then you can consider the VPF. However, if you are investing for other long-term goals like your children’s higher education or marriage which may fall due within 15-20 years, you may go for PPF. If you are a self-employed person, then PPF is your only option.
If you fall in the higher income tax bracket and are looking to invest larger amount in fixed income investment options with tax-free return, then you can utilise both the options together.