Public Provident Fund (PPF) and Voluntary Provident Fund (VPF) are powerful financial tools offered by the Government of India to help you save for retirement. However, many of us confuse the two, which can sometimes cause us to make poor financial planning decisions. Want to avoid this situation? Do not worry. We are here to clear away the dark clouds of confusion.
Voluntary Provident Fund (VPF) and Public Provident Fund (PPF)
Many people often confuse PPF and VPF, mainly because they have similarities. However, there are some specific differences that one needs to understand between these two to better understand them and make sound financial decisions. One of the biggest differences between the two is the access to the Public Provident Fund (PPF) by people working in the unorganized sectors and self-employed individuals. However, this is not the case with the Voluntary Provident Fund as it can only be accessed by salaried employees.
How does VPF account work?
Voluntary Provident Fund accounts are one of the most important investment options for salaried workers. Through this option, a salaried individual can save more for retirement, beyond the mandatory deduction of 12% of base salary. An important aspect to note here is that only salaried employees are eligible to access the Voluntary Provident Fund. However, no employer can force employees to invest in a Voluntary Provident Fund (VPF). As the name suggests, this investment option is a voluntary action that any employee can take.
How does PPF account work?
PPF is a popular investment scheme created for both self-employed individuals as well as workers working in unorganized sectors. The aim is to provide them with income security in old age. According to many people’s preference, PPF is a fixed income security scheme. This scheme enables one to invest a maximum amount of Rs. 1,50,000 and the minimum amount is Rs. 500. One can get tax free and assured interest using PPF account.
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Difference between PPF and VPF
The first difference to consider is who is eligible to open a VPF and PPF account. People working in the unorganized sector and any self-employed person are eligible to open a PPF account. However, in case of VPF account, only salaried employees are eligible to open an account.
The second point of discussion here could be the interest rate offered. In case of VPF account, the interest rate offered is 8.5%, similar to EPF account. However, in case of PPF account, the interest rate offered will be a little lower i.e. 7.1% of your savings.
Profits received are also important factors to discuss. The interest one gets in case of PPF account is exempt from all income taxes. On the contrary, direct contributions in case of VPF account are subject to tax deduction, as per Section 80C of the Income Tax Act, 1961.
It’s finally adulthood! One cannot withdraw the deposited amount in case of PPF account unless the account matures. In case of PPF account, the maturity period is 15 years. However, in case of VPF account, the employer is free to withdraw money whenever he or she needs or wants. There is a condition to consider here. In case an employee withdraws money before completing 5 years of VPF account, the amount will be taxed.
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Source: pagasa.edu.vn