In recent years, more and more working individuals are talking about and considering the importance of creating retirement funds. And in the vast Indian financial market, there is no paucity of schemes that people can consider for retirement planning. However, the abundance might also be challenging when trying to zero in on a specific scheme for that purpose.
Therefore, it is essential to stack one’s monetary preferences against the available options when opting for an investment scheme. On that note, if individuals prefer an avenue that offers average returns while ensuring supreme corpus security, then Provident Funds (PFs) are ideal.
In that respect, two of the most sought-after Provident Funds in India are the Public Provident Fund (PPF) and the Voluntary Provident Fund (VPF). When considering VPF vs PPF, there are numerous points of distinction that an individual needs to assess before choosing any of them for their retirement planning.
It is an extended retirement-cum savings scheme where an employee voluntarily deposits a portion of his/her salary in their Provident Fund account. VPF is an extension of the Employees’ Provident Fund (EPF). As per EPF rules, a person working in an organisation that employs more than 20 individuals is required by law to maintain an EPF account.
Both an employee and employer must make a compulsory contribution of 12% of such employee’s salary (basic pay + dearness allowance) to an EPF account. However, an employee can choose to contribute an additional amount over and above the necessary amount as a Voluntary Provident Fund. In that case, the employer is under no obligation to provide any additional amount over and above what is compulsory.
A Voluntary Provident Fund is simple to initiate and operate. An individual simply needs to contact their organisation’s accounting or HR department to raise a request through a registration form. From thereon, such an additional contribution will be deducted from that individual’s salary and transferred to their EPF account. It is a critical difference between VPF and PPF.
Moreover, since it accumulates in the same account as that of EPF, they both carry similar interest rates. Therefore, currently, the interest rate is 8.5%, cut short by 1.5% from the previous rate. This rate is set by the Employees’ Provident Fund Organisation or EPFO.
The eligibility criteria for initiating a Voluntary Provident Fund are –
Companies can, of their own accord, open EPF accounts for their employees even without meeting the minimum threshold. The set of eligibility criteria is a critical point of difference in PPF vs VPF.
There are no laws binding the amount of contribution to a Voluntary Provident Fund. That is another primary difference between PPF and VPF. An individual can choose to deposit 100% of their salary (basic pay + dearness allowance) as a monthly contribution to VPF.
A Voluntary Provident Fund remains active until such individual resigns or retires. Individuals can choose to transfer their EPF account when they change employers. It is a crucial point of distinction in VPF vs PPF.
Furthermore, an individual can prematurely withdraw from their EPF account only under a few conditions. These include medical purposes, repayment of a loan, marriage of self or anyone financially dependent, or when out of employment for more than 2 months.
VPF, similar to EPF, belongs to the EEE or Exempt-Exempt-Exempt category. That means all contributions made to VPF are exempt from taxation u/s 80C of the I-T Act 1961 up to a limit of Rs.1.5 lakh. Moreover, the interests earned on the balance along with the maturity amount are exempt from wealth tax.
It is a government-backed savings scheme designed for individuals from all sectors of the economy, as opposed to VPF. Any citizen living in India can open a Public Provident Fund account, be it a salaried individual, a self-employed individual, a student, or a retired person.
The Government of India overlooks the operations of a Public Provident Fund. Therefore, the central government is also responsible for setting the PPF interest rate as well as paying the same to PPF subscribers. The Indian government revises the PPF interest rate every quarter based on the prevailing rates on government bonds.
The VPF vs PPF interest rate poses a crucial area of difference. The PPF interest rate for the Q1 of FY 2020 – 21 (April to June) is 7.1%.
Any individual who is an Indian citizen and lives in the country is eligible to open a PPF account. That means NRIs cannot open a PPF account. Similarly, HUFs are not eligible to open a PPF account in India.
A critical point in the VPF vs PPF distinction is the contribution criterion. PPF subscribers need to deposit a minimum of Rs.500 every year until maturity. Conversely, the maximum amount that can be deposited annually in a PPF account is Rs.1.5 lakh. Furthermore, the number of deposits cannot exceed 12 in a specific year.
The maturity period for PPF is 15 years. It is another major difference between VPF and PPF. Moreover, a PPF subscriber can extend the lock-in period by a block of 5 years from thereon once the stipulated time is over.
Deposits amounting to a maximum of Rs.1.5 lakh are annually exempt from taxation under Section 80C of the Income Tax Act 1961. Moreover, the interest earned and the balance withdrawn at the end of maturity is exempt from tax.
The following table illustrates the difference between PPF and VPF.
|Parameters||Voluntary Provident Fund||Public Provident Fund|
|Nature||Retirement-cum savings scheme.||Savings scheme.|
|Eligibility||Employed individuals.||Any Indian citizen living in the country.|
|Contribution||Any amount up to 100% of the subscriber’s salary.||Annual minimum contribution – Rs.500; annual maximum contribution- Rs.1.5 lakh.|
|Premature withdrawals||For medical purposes, own marriage or that of a dependent individual, repayment of a loan, purchasing or constructing a house, unemployment for more than 2 months.||Allowed after 7 years from the date of account opening for a child’s education or medical purposes.|
|Maturity period||Until retirement.||15 years.|
To sum up, both investment options have their own pros and cons and are governed by different rules. Before choosing the right option, understand the terms of each of these schemes as well as assess your liquidity needs and withdrawal rules attached to these schemes to take a call.