Suppose you’re given an option between FD, Debt Funds, PPF or VPF for your retirement. What would you choose from amongst the above-mentioned investment options? I have seen the majority of the people asking for safe investments with good returns. Nevertheless, they still don’t consider VPF in their portfolio.
Now, before moving any further, let us talk about VPF so that you can understand what it is all about.
What Is VPF In The Salary – Voluntary Provident Fund (VPF)?
There is no such thing like VPF in the salary. The 12% amount contributed by the employer and employee from the basic-salary and Dearness Allowance (DA) is called EPF. Moreover, EPF is known as Employee Provident Fund. An employee can go beyond the 12% limit and make additional contributions towards EPF. The additional amount contributed towards EPF is called Voluntary provident fund (VPF). It’s only contributed by an employee and the employer does not contribute anything beyond 12%, which is mandatory.
How Much Can I Contribute Towards VPF?
There is a specified limit associated with VPF contribution. You can contribute a maximum of 100% of your basic salary along with DA in VPF. Only the salaried employees who are already contributing towards EPF are allowed to contribute to VPF. The interest rates are the same as EPF.
Now, coming back to the main question, which one of these two is better?
FDs (Fixed Deposits)
FDs are undoubtedly safe and secure.
The actual problem begins with interest rates. As of now, when most of the FDs are offering around 7% returns, EPF returns are more than 8.5%.
Now, if this difference of 1.5% remains there for a long time, it can definitely affect your debt portfolio.
The second problem with FDs is none other than taxation. In which, the interest amount is added to your taxable income and taxed accordingly. Higher the tax slab of an individual, lesser the returns in FD.
The third problem with FDs is the frequently changing interest rates which never remain static. On the other hand, PF rates undergo change only once in a year.
But still, FDs have a great advantage of liquidity. You can break it at any given point in time with a small penalty. The same is not available in the case of EPF or VPF.
Debt funds are not as secure as FDs. However, they offer relatively better returns than FDs in normal scenarios. There are various risks in debt mutual funds such as credit risk, interest rate risk, and concentration risk. I won’t explain the risks but I’d definitely add that Debt funds are riskier than FD, PPF, and EPF.
The only advantage is in terms of taxation. You would receive the indexation benefits if you hold the debt funds for a period of more than 3 years.
PPF (Post Provident Fund)
PPF is indeed an evergreen investment. The investment amount is eligible for tax deduction under Section 80C of the Income Tax Act. The interest earned as well as the maturity amount is tax-free. The investment comes under the EEE category (Exempt- Exempt- Exempt).
The interest rates in PPF are better than FDs. Although the maturity period is 15 years, you can extend it for a 5-year block for any number of times. And that too – with or without the contribution
Also Read: PPF Extension Beyond 15 Years
The only problem comes with the liquidity but it’s there for just a few initial years. Partial withdrawal is allowed only after the completion of 5 years from the end of the subscription-year.
If you ask me about my personal choice, I would go for PPF first from amongst all the above-mentioned options.
The interest rates in VPF are higher than all of the above-mentioned investments. The interest rates for the year 2018-19 were declared as 8.65%. If you compare the same with PPF, the interest rates have been 7.9% from July 1, 2019, onwards.
The investment is as secure as FDs and PPF. The reason is that it’s backed by the Government Of India.
The main problem with VPF is liquidity. Be it EPF or VPF, there’re certain strict withdrawal limits in both which have to be followed.
The second problem is related to tax. The withdrawal is taxable in case if it’s made before 5 years. (Applicable in the case of resignation and being unemployed for a period of 1 or 2 months)
FD VS DEBT FUNDS VS PPF VS VPF
All the various pros and cons for different types of investments have been mentioned above. If you’re given an option, what would be the best-suited instrument for your retirement needs? I’m only talking about retirement. VPF, in no way, is a good investment for other goals like child education, marriage, and so on. It’s so because the partial withdrawal conditions are very strict in VPF.
If you ask me about my personal choice, I would open a PPF account at first. But what if I still need to invest more in debt instruments as per my retirement goals? In such a case, I’d make it 50:50 in both VPF and debt funds. Yes, FDs are also required for liquidity along with a small amount in debt funds too.
VPF Calculator 2019
Use our PF calculator to calculate the amount of PF at the time of retirement
Commonly Asked Questions About Voluntary Provident Fund (VPF)
Now let us try to answer some of the most commonly asked questions about the Voluntary Provident Fund (VPF).
Q1.Is VPF Exempted From Tax?
Yes, VPF is exempted from taxation like EPF.
Q2.Can I Stop VPF Contribution?
Yes, you can stop VPF contribution but it’s not possible to do so in the middle of the year.
Q3.How Is VPF Interest Calculated?
VPF interest rates are the same as EPF which are announced by Government of India at every year.
Q4.Is VPF covered under Section 80C?
Yes, VPF contribution is covered under Section 80C but the maximum limit is 1.5 Lakhs only.
Q5.Which one is better -VPF Vs PPF?
Both are good. But between VPS Vs PPF, PPF is better than VPF as the latter has strict withdrawal rules.
Now that you’re familiar with the concept of VPF, what do you think is better between VPF Vs PPF Vs Debt Funds Vs FDs?