In this fast pacing economy, working professionals are becoming more and more aware of the significance of retirement planning. But with so many investment alternatives now on the market, the choice might be overwhelming. PPF and VPF are two outstanding provident fund plans for investors with low risk profiles. These investments are perfect for long-term objectives like retirement planning since they are extremely safe and provide predictable returns.
However, there are some significant differences between the two which should be understood before deciding your preferred investment vehicle. But first, let us try to understand PPF and VPF in brief.
Voluntary provident fund
As the name implies, an employee who participates in the VPF scheme may voluntarily contribute any portion of his income to the Provident Fund account. Nevertheless, the contribution must be greater than the 12% PF cap set by the government. However, the employer is not required to make any contributions to the VPF.
Employees are permitted to contribute 100% of their base pay and DA. Since there is no separate account for VPF, the interest given will be the same as EPF, and this money will only be credited to the EPF Scheme account.
Public provident fund
PPF is a government-guaranteed fixed income security scheme with the specific goal of ensuring the unorganized sector's and self-employed people's financial stability in old age. Anyone can make contributions to a PPF account and get guaranteed, risk-free returns.
The interest on the PPF subscription is compounded, so in addition to receiving interest on the principal invested, you also receive interest on any interest that has already accrued.
VPF vs PPF
In India, only those who get a salary are permitted to register a VPF account. It is often opened simultaneously with the EPF account that you open when you begin working. The finance or human resources department at your workplace is in charge of handling the account opening.
On the other hand, anyone who is an Indian citizen may open a PPF account. Anyone can open one at authorized banks and post offices, including paid workers, business owners, independent contractors, and even children. Investors can also take use of this option offered by several sizable private banks.
Rate of interest
The government announces a yearly interest rate for VPF accounts, which is the same as the rate received on EPF. For 2022–2023, the interest rate is 8.1%.
While the rates for small savings schemes are fixed by the government every three months. For the quarter of July through September, the PPF interest rate is 7.1%.
Under Section 80C of the I-T Act, annual investments in VPF up to ₹1.5 lakh may be utilised to qualify for tax deductions. However, the additional investment would not be taken into account for tax deductions under Section 80C if it exceeds ₹1.5 lakh.
Additionally, interest will continue to be tax-free up to a contribution of ₹2.5 lakh from both the employee and the employer. However, if an investment earns interest over this point, it will be taxed because the interest is now considered income.
For PPF account investments, tax deductions up to a total of Rs. 1.5 lakh per year are allowed under Section 80C of the I-T Act. Additionally, the interest is tax-free. Investors retain tax-free ownership of the whole cumulative amount as well as the interest component when the tenure is finished.
The amount in the voluntary provident fund is locked in until the employee retires or meets a certain requirement to take a premature withdrawal. Whereas in a public provident fund, investments are locked up for a mandatory term of 15 years, however, withdrawals are permitted after seven years.
Both VPF and PPF are outstanding tax-saving vehicles. They provide a set rate of return on investments and are supported by sovereign guarantees. Your choice between the two should be determined by your investment horizons and expected returns.