Retiring stress free is something many of us aspire to achieve. However, realizing that goal takes careful planning and timely action. A balanced portfolio with a mix of debt and equity instruments is also an essential part of financial planning. If you are looking for long-term, low-risk instruments offering assured returns, Employee Provident Fund (EPF), Voluntary Provident Fund (VPF) and Public Provident Fund (PPF) are three popular options you can explore. Let’s take a deeper look into the various aspects of each investment to help you choose the one best suited for you.
Employee Provident Fund (EPF)
EPF (Employee Provident Fund) or PF (Provident Fund) is a retirement savings scheme backed by the government of India. Investing in EPF is mandatory for most employees in the organized sector. Under the scheme, 12% of the employee’s monthly basic salary and dearness allowance is redirected to their EPF account, along with a matching contribution from their employer. The current rate of return for EPF is 8.1%.
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Voluntary Provident Fund (VPF)
Voluntary Provident Fund, or VPF, is a government-backed voluntary contribution scheme to help employees save for retirement. It is a long-term investment option wherein salaried employees can choose the percentage of the contribution they wish to set aside from their salary. Unlike EPF, where the mandatory contribution ranges from 8% to 12% of the basic salary, VPF allows employees to save as much as 100% of their basic salary and dearness allowance. However, under VPF, the employer is not obligated to increase their contribution to match yours. VPF currently offers an interest rate of 8.1%.
Public Provident Fund (PPF)
PPF is a non-mandatory, long-term investment scheme geared towards retirement planning. You can invest in the scheme in a lump sum or instalments. The minimum annual investment allowed is Rs.500, and the maximum is capped at Rs.1.5 lakh. If you choose to invest in instalments, do so ideally within the first five days of the month, as interest gets calculated between the end of the fifth day and the last day of the month. PPF interest currently stands at 7.1%.
Who can open an account?
EPF: The scheme is mandatory for all organizations registered under the EPF Act with an employee count of 20 or higher. But, organizations with 20 or fewer employees may also register. The scheme is mandatory for all employees earning up to Rs.15,000/month.
VPF: This scheme is only available to salaried individuals in India, who can contact their organization’s HR or Finance department to open a VPF account. Once you are done, your existing EPF account will serve as the VPF account.
PPF: You can open a PPF account if you are an Indian citizen who is salaried, a business owner, self-employed, or even a minor. Many public and private banks and post offices offer the PPF facility.
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How long can one invest?
EPF: You can continue investing in EPF until you retire.
VPF: Like EPF, VPF also continues till you retire. However, VPF has a 5-year lock-in period, so you cannot terminate or discontinue your VPF account before it completes five years. The alternative, in this case, would be to switch to a regular EPF account.
PPF: PPF accounts come with a 15-year lock-in period. Once that is complete, the account can be extended in 5-year blocks indefinitely.
Taxation
EPF and VPF: Annual investments in EPF and VPF up to Rs 1.5 lakh are eligible for tax rebate under Sec 80C of the I-T Act. While you can invest over Rs.1.5 lakh in VPF annually, the additional investment will not be considered for tax deductions under Section 80C.
Further, interest earned on contributions (by the employer and employee) up to Rs 2.5 lakh will be tax-free. Interest earned on an annual contribution up to Rs. 5 lakh, made solely by the employee, will also be tax free. But, tax will be levied on interest earnings if the employee’s annual contribution exceeds Rs.5 lakh.
PPF: PPF investments up to Rs.1.5 lakh per annum are eligible for tax deductions under Section 80C of the I-T Act. Moreover, the interest earned and the accumulated sum at the end of the investment tenure are also tax free.
Withdrawal of funds
EPF and VPF: You can withdraw the accumulated EPF or VPF corpus on retirement or if you are unemployed for more than two months. Moreover, these facilities also allow for partial withdrawals for expenses such as medical emergencies, buying or constructing a house, or marriage. However, in the case of VPF, any partial withdrawal done from the account before it completes the base tenure of 5 years, the accumulated sum will be taxed.
PPF: Investors can withdraw their accumulated PPF investment upon completing the 15-year lock-in tenure. However, partial withdrawals are allowed for restricted use only after the completion of 6 years. Account holders may also make premature withdrawals equivalent to 50% of the PPF corpus at the end of the 4th year without any tax implications.
Conclusion
EPF is a mandatory savings scheme for salaried employees in India. On the other hand, VPF and PPF are non-mandatory, long-term, tax-saving investments suited for long-term goals such as children’s education, marriage, or retirement. The above factors are a fundamental guide to help you understand and choose the investment best suited to your financial needs.
