Post Budget Impact-VPF or PPF
Salaried employees can contribute towards Employee’s Provident Fund when their account is active and they are regularly investing therein. Voluntary Provident Fund is an option for all who want to contribute towards a provident fund account being an extension of EPF including a minor. Public Provident fund is available to everyone.
Keeping the latest budget in mind, we can compare the above two from various angles like investment period, returns and tax benefits. There are a few fundamental differences which make it easier for investors which scheme is more beneficial to them, depending on which they will prioritise their investment options.
Looking from eligibility criteria, only salaried employees can opt for a VPF. Public at large have the PPF option whether being salaried or not.
The interest rate for EPF was 8.5% for the FY 2019-20. But it is yet to be decided for the current year. Whereas in case of PPF it is 7.1% for the quarter ending March,2021. Interest rates or returns offered by both can become a decisive factor for making an investment. The trend over a period of number of years highlights the pattern to show which one is better.
VPF and PPF both qualify for deduction under section 80C of the Income Tax Act,1961. Tax treatment for the returns received from the VPF and PPF investments are different. Returns on PPF are entirely exempt from tax but are subject to a maximum investment limit of 1.5 lakh. Finance Bill 2021 has proposed that returns received from investment made in a VPF if exceeds Rs.2.5 lakh, shall be taxable. Thus, the budget discourages investments made to a VPF exceeding Rs.2.5 lakh.
Contributions towards VPF and PPF can be made up to a maximum of 100% of basic salary plus dearness allowance. PPF contribution can be made in the range of Rs.500 (minimum) to Rs.1.5 lakh(maximum) In order to keep the account active, the minimum contribution should be made every year. No such limits prevail in case of VPF. It comes with a sovereign guarantee.
Salaried employees have an option to contribute more towards their VPF accounts by way of an application given to their employer mentioning how much do they want to contribute more. In absence of any such instructions, deduction of a uniform amount shall be made throughout the tenure of service by the employer.
PPF rules are not stringent when it comes to withdrawal of funds to meet obligations like paying up a loan, marriage expenses, any medical emergency and children’s education etc. But in case of VPF withdrawals are not allowed unless one retires. One needs to keep in mind the liquidity aspect while making the investment, what if the funds are needed before the retirement age?
A PPF account can be extended after the initial maturity period of 15 year in a block of five years. But in case of VPF, the account will not earn interest if the same is not withdrawn even after three years of retirement.
PPF allows a maximum of Rs.1.5 lakh contribution against VPF allowing more contributions but returns shall be liable to tax when in any year contribution crosses Rs.2.5 lakh mark. Returns on PPF are exempt from tax, they look better from returns point of view. But if we adjust income tax in the 30% bracket, VPF offers 5.85% return, which is higher than other fixed investment options.
Post-tax return comparison
| Investment option | Interest Rate in% | Post tax return in 30% bracket |
|---|---|---|
| VPF | 8.5 | 5.8 |
| PPF | 7.1 | 7.1 |
| KVP | 6.9 | 4.7 |
| NSC | 6.8 | 4.7 |
| Bank FD (potentially the highest) | 6.0 | 4.1 |
Bhoi Smrutirekha Dharanidhar