Why Opt for PPF if You Can Benefit More With a VPF?

Public Provident Fund (PPF) seems to be the first answer for any investor looking for a low risk, secure and good return investment. With its Tax free clause, it sure is attractive to investors. However, is it really that attractive?

If we compare it with Voluntary Provident Fund (VPF) we begin to realize that the PPF is not much of an investment as it is made up to be.

Understanding PF, VPF and PPF

Now let’s understand what VPF is and how it flairs better than a Public Provident Fund.

To know VPF, we must first be familiar with a Provident fund (PF). Every salaried employee has a Provident Fund (also called as Employee Provident Fund or EPF) account and is a mandatory saving mechanism imposed by Government of India. PF requires you to contribute 8-12% of your basic salary and your employer invests an equal amount. The fund offers an interest rate of 9.5% compounded every year. However you can contribute more than this 12% of your basic salary.

Voluntary Provident Fund or VPF is nothing but this extra contribution. You can contribute more than this 12% and up to 100% of your basic salary to the PF account. This is not mandatory and is done voluntarily, thus the name Voluntary Provident Fund. VPF is no separate account from your Provident Fund and hence earns the same interest rate as PF does; that is 9.5% compounded yearly.

On the other hand, Public Provident Fund is a generic fund to all, immaterial if you are salaried or not. PPF is opened through a post office or from a SBI branch. The fund earns only 8.6% interest compounded annually and has a maturity term of 15 years.

Your contributions to PF, VPF and PPF upto Rs. 1 lakh per year is tax exempted under Section 80C of Income Tax Act 1961.

How VPF Superior than PPF?

Interest Rate: The main factor which makes VPF better than PPF is the interest rate itself. VPF is fixed at an annual compound rate of 9.5% whereas PPF is only 8.6%. A mere 0.9% difference in compound interest is enough to make a huge difference in the returns you get.

Suppose your annual basic salary is 6 lakhs. Your mandatory PF contribution turns out to be Rs. 72,000 per annum which is 12% of 6 lakhs. You can still invest 28000 more every year in PPF or VPF to get the tax exemption of total 1 lakh Rupees.

If you choose PPF, Rs.28,000 is getting compounded every year at the rate of 8.6% giving you a whopping Rs 9,61,748.14 in 15 years. At the same time, if you put the Rs.28000 in VPF, your PF contribution and VPF together make it 1 lakh compounded every year at the rate of 9.5% giving you astounding amount of Rs 37,34,287.46 in the same time period!

Maturity period: The amount deposited in a Voluntary Provident fund can be withdrawn if you are changing job or when you retire. A PPF on the other hand has a maturity of 15 years which is fixed.

Premature Withdrawal/ Loan Facility: In case of VPF, 5 years of continuous service (need not be with the same employee), makes you eligible to apply for loan or withdraw money for urgent needs.  Note that the PF withdrawn is not taxed only if it is used for purposes defined as non-taxable.

In the case of PPF, the account has a lock-in period of 3 years before which you cannot apply for a loan. After 3 years till 6th year, you can avail a loan at 2% interest rate more than the rate of return. After 5 years you can partially withdraw the balance amount in PPF account.

Contribution Limit: For a VPF there is no minimum or maximum contribution amount. You can contribute the whole of your basic salary to a voluntary provident fund.

However for PPF there is an upper and lower limit for contribution. The amount that you can contribute must not be lower than Rs.500 and not exceed Rs.100, 000 per year.

Tax Exemption: Both VPF and PPF are exempt from tax implications, under Section 80C. The tax exemption is till Rs.1 lakh. By investing in VPF you are free of the burden of looking for further tax saving investment options.  In addition, interest earned from both PPF and VPF are tax free.

Same as PF account: VPF is deposited to your existing PF account. You can talk to HR personnel to increase your provident fund contribution. This means that you need not go through the hassles of starting a new account.

On the other hand, for a PPF you have to open a new account in a post office or in a bank, which makes it tiresome to start a PPF.

Limitations of VPF

Applies only to Salaried Class: The Provident fund and Voluntary Provident Fund applies only to salaried class. PF is not compulsory if you are working in a company with employee strength less than 20.  Similarly, if you are a businessman or a self employed, you do not have a PF.

Where as a Public Provident Fund have no such criterion and anyone can start an account. Therefore, if you are working in a small company or is self employed, then the only option for a secure, tax free investment is PPF.

Interest Rates are Liable to change: The Government declares the interest rate for both PF (VPF) and PPF each financial year. Right now VPF offers better interest rate than PPF. These rates can change in the future and can be the opposite. But as a sigh of relief, PF’s interest rate has always been higher than PPF in the past.

VPF Payment Compulsory: The VPF once declared is deducted from the salary by the employer itself. So you cannot escape paying towards VPF once you commit, unless you revoked your decision. In case of PPF, you can still maintain the PPF account by contributing an amount as less as Rs.500 per year.

VPF Offers no Voluntary Withdrawal: From your VPF there is no provision to withdraw the voluntary fund alone. On the other hand, when PPF matures after 15 years you get the entire money, which is all tax free.

The limitations of VPF are a concern only for a dynamic investor. In fact, VPF offers a good solution than PPF to all those looking for a good retirement corpus. It is safe, secure and offers more returns. What more could a risk averse investor hope for?

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