VPF Vs PPF: Which Is Better For You & Should You Invest In Both?
The VPF has a 5-year lock-in period with no withdrawals allowed, and premature withdrawals are taxed as income from salary. Despite being separate accounts, the VPF and EPF offer similar benefits
Voluntary Pension Fund (VPF) and Public Provident Fund (PPF) are two popular and trusted long-term investments that cater to different investment needs. VPF is a part of Employee Provident Fund (EPF) and is tied to your salary, while PPF is a government-backed savings scheme open to all individuals. Both these investments offer a fixed interest, stable returns, and attractive tax benefits, making them ideal choices for risk-averse investors. Moreover, the government is also considering raising the tax-free contribution limit under the Employees' Provident Fund Organisation (EPFO) from the current ₹2.5 lakh. But which of these instruments is right for you and how do you choose between them? Let’s find out.
Voluntary Provident Fund (VPF)
The Voluntary Provident Fund (VPF) is a government savings scheme for salaried individuals in India. It allows voluntary investments of up to 100% of basic pay and Dearness Allowance (DA) in addition to the compulsory 12% contribution to the Provident Fund. VPF offers an 8.25% interest rate, same as EPF. Tax benefits of VPF fall under the EEE category wherein the contribution, interest, and final returns are tax-free. VPF contributions up to ₹1.5 lakhs p.a. are eligible for deduction under Sec 80C, while the interest accrued on contributions up to Rs.2.5 lakhs is also tax-free. The VPF has a 5-year lock-in period with no withdrawals allowed, and premature withdrawals are taxed as income from salary. Despite being separate accounts, the VPF and EPF offer similar benefits, and can be easily transferred when switching jobs. All these benefits make it an ideal instrument for boosting your efforts towards realising long-term goals. However, for inflation-beating returns, you can explore other investments such as equities, to diversify your portfolio.
Public Provident Fund (PPF)
Public Provident Fund (PPF) is another low-risk savings scheme that offers steady returns and generous tax benefits. This investment features a 15-year lock-in period and offers a 7.1% interest rate (Oct-Dec quarter). PPF contributions up to ₹1.5 lakh annually are tax exempt under Section 80C. Like VPF, PPF also falls in the EEE category, with tax-free interest and maturity proceeds. PPF deposits can be made in lump sum or instalments, with the minimum mandatory annual deposit starting at ₹500. Partial withdrawals can be made from the 7th year, and you can apply or a loan against your PPF account after 3 years of operation.
VPF vs PPF: Which Should You Choose?
Both PPF and VPF are low-risk investments offering guaranteed returns and ideal for long-term financial goals. However, choosing between them depends on your financial objectives, investment timeline, and return expectations. While VPF offers a higher interest rate, it follows a different tax treatment compared to PPF, which can alter your final returns. PPF, on the other hand, is a reliable option for medium to long-term goals like children’s education or marriage, which may be 15-20 years away. Moreover, PPF interest rates are reviewed quarterly and can affect returns if lowered.
While investors can benefit by investing in PPF and VPF to enjoy tax-free interest, both options offer limited liquidity due to their lock-in periods and premature withdrawal penalties. Given their benefits, both investments can benefit your portfolio, helping you realise your long-term goals like children's marriage or retirement planning. However, in the interest of mitigating your overall risk, it is essential to diversify your portfolio with other asset classes like equities that can offer potentially higher returns.
The author is the CEO of BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.
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