Tax-saving investment: 7.1% interest in PPF or 8.25% returns in VPF; which is a better option to save tax this year?

Public Provident Fund (PPF) has been a go-to option for traditional investors to save tax while planning for retirement. However, PPF interest rate is unchanged at 7.1% for the January-March quarter of 2024. Is there any other option that offers higher returns, lowers your income tax outgo and saves money for long-term goals? If you are salaried, you can check Voluntary Provident Fund (VPF) which offers better returns and other benefits similar to PPF. However, VPF is not for everyone. So before you decide where to put your hard-earned money, let’s compare these two investment options — PPF and VPF.

Tax-saving ideas: Who can invest in PPF and VPF?

Any resident Indian can invest in PPF.

But only salaried employees who have an active Employee Provident Fund (EPF) account and regularly contribute towards EPF can put money in VPF. It is nothing but an extension of your EPF account. As it is voluntary, the contribution towards VPF will be over and above the 12% mandatory contribution towards EPF.

“It’s important to note that VPF is exclusively available to salaried individuals, whereas PPF caters to both salaried and self-employed individuals,” says Nirav R Karkera, Head – Research, Fisdom.

Maximum and minimum investment: How much can you invest in PPF and VPF?

You can open a PPF account with just Rs 100. Keep in mind that you must deposit a minimum of Rs 500 in a financial year. You can invest a maximum of Rs 1,50,000 in PPF in a financial year. There is no minimum amount or minimum annual investment for VPF. You can contribute up to 100% of your basic pay in EPF and VPF taken together.

PPF and VPF: Tenure

PPF accounts have a tenure of 15 years. It can be extended for a block for five years any number of times.VPF will continue till retirement unless you resign from the workforce earlier. You can withdraw your full EPF amount after superannuation. To claim the final EPF settlement, one has to retire from service after reaching 58 years of age.

So both PPF and VPF are for long-term savings.

PPF vs VPF: Interest rates compared

You can get an interest rate of 7.1% if you invest in PPF during January-March. The interest rate for PPF is the same for the April-June quarter, the interest rate of PPF remains the same.

The Centre revises the interest rates of small savings schemes every quarter. So if the PPF rate is increased, you will get a higher interest rate for the said quarter. If the interest of PPF goes down, you will get lower interest for that quarter.

Do keep in mind that the PPF interest rate remained at 7.1% since the first quarter of 2020-21.

The Employees’ Provident Fund Organisation (EPFO) announced an interest rate of 8.25% for the financial year 2023-24. The interest rate was 8.15% for 2022-23 and 8.1% in 2021-22.

When comparing interest rates, VPF typically offers slightly higher interest rates than PPF. Going by the historical interest rates offered by both PPF and VPF, the chances of earning a higher interest rate are better with the latter.

Income tax savings: PPF vs VPF taxation rules

Your PPF investments qualify for Exempt-Exempt-Exempt or EEE status. The amount you invest qualifies for a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961. The interest you earn from a PPF account is also tax-free. Further, there is no tax on the maturity proceeds from the PPF account.

You can get a tax deduction on contribution of up to Rs 1.5 lakh under Section 80C for investing in EPF and VPF as well. However, the income from VPF is tax-free if it fulfills certain conditions. If an employee’s contribution to EPF and Voluntary Provident Fund (VPF) exceeds the limit of Rs 2.5 lakh in a financial year, the interest earned on excess contribution will be taxable. It will be taxable as per the income tax rates applicable on your income.

If you are a government employee or an employee whose employer does not contribute to the EPF account, the limit of tax-exempt EPF and VPF is Rs 5 lakh.

Tax-saving ideas: PPF vs VPF: All you need to know

Risk-protection: PPF vs VPF

Both PPF and VPF carry sovereign guarantees; hence, there is no difference when it comes to risk.

Liquidity: Can you withdraw money from PPF and VPF?

You can partially withdraw from PPF after five years from the end of the financial year in which the first investment was made. You can also get a loan against your PPF balance between three years and six years from the start of your investment.

The full VPF amount can be withdrawn in case you have been unemployed for more than two months. You also get the partial withdrawal option for certain purposes such as medical emergencies, construction or purchase of a new house, renovation of the house, repayment of home loan and wedding.

PPF vs VPF: How to open an account

PPF accounts can be opened at designated post offices and with select banks. Many banks now have the facility to open a PPF account online. For VPF, you need to consult the HR department of your organisation and apply for the same.

PPF or EPF: Where should you invest this financial year?

“Your choice between VPF and PPF hinges on factors such as eligibility, personal preferences, and long-term financial goals,” says Karkera.

If you are saving for retirement, a higher interest is preferable as it means higher returns from the investment. “Currently, VPF at 8.15% offers a 1% higher interest rate than PPF at 7.1%, and presents a great option to invest for retirement goals,” says Abhishek Kumar, a SEBI-registered RIA. If accessibility and flexibility are paramount to you, PPF might be the preferable choice despite its slightly lower interest rate, Karkera adds.

Public Provident Fund (PPF) has long been a popular choice for conservative investors looking to save on taxes while preparing for retirement. The PPF interest rate remains steady at 7.1% for the January-March quarter of 2024. Are there any other options out there that offer higher returns, reduce your tax burden, and help you save for long-term goals? If you’re a salaried individual, you might want to explore the Voluntary Provident Fund (VPF) as an alternative to PPF, offering better returns and similar benefits. However, VPF is not available to everyone, so it’s crucial to compare these two investment avenues before making a decision.

Tax-saving options: Who can invest in PPF and VPF?

Any Indian resident can invest in PPF, but only salaried employees with active Employee Provident Fund (EPF) accounts who regularly make contributions can invest in VPF. VPF is essentially an extension of your EPF account, with voluntary contributions exceeding the mandatory 12% EPF contribution. “It’s essential to note that VPF is exclusively for salaried individuals, while PPF caters to both salaried and self-employed folks,” notes Nirav R Karkera, Head of Research at Fisdom.

Maximum and minimum investment: How much can you invest in PPF and VPF?

You can start a PPF account with just Rs 100 and must deposit a minimum of Rs 500 in a financial year. The maximum amount you can invest in PPF in a financial year is Rs 1,50,000, while there’s no minimum or maximum limit for VPF contributions. You can contribute up to 100% of your basic pay towards EPF and VPF combined.

PPF and VPF: Tenure

PPF accounts have a fixed tenure of 15 years, extendable in blocks of five years indefinitely. VPF contributions continue until retirement or earlier if you leave employment. You can withdraw your full EPF amount upon superannuation, and to claim the final EPF settlement, you must retire after turning 58 years old.

Both PPF and VPF are designed for long-term savings.

PPF vs VPF: Interest rates compared

The interest rate on PPF remains at 7.1% for the January-March quarter. The government revises small savings scheme interest rates quarterly, so changes may occur. Historically, VPF tends to offer slightly higher interest rates than PPF, making it a potentially more lucrative option.

Income tax savings: PPF vs VPF taxation rules

PPF investments enjoy tax benefits under the Exempt-Exempt-Exempt (EEE) status, with contributions up to Rs 1.5 lakh eligible for deduction under Section 80C. The interest earned on a PPF account is tax-free, as are the maturity proceeds. Similarly, EPF and VPF contributions of up to Rs 1.5 lakh are eligible for tax deductions under Section 80C. However, income from VPF is tax-free only if certain criteria are met. Excess contributions exceeding Rs 2.5 lakh in a financial year will attract tax on the interest earned based on applicable income tax rates.

Tax-saving ideas: PPF vs VPF: All you need to know

Risk-protection: PPF vs VPF

Both PPF and VPF are backed by government guarantees, providing equal levels of security.

Liquidity: Can you withdraw money from PPF and VPF?

Partial withdrawals are possible from a PPF account after five years and loan facilities are available between three to six years of account opening. Full VPF withdrawals are allowed if you’ve been unemployed for more than two months, with partial withdrawals permitted for specific reasons like medical emergencies, housing, or weddings.

PPF vs VPF: How to open an account

PPF accounts can be opened at select banks and designated post offices, with some banks offering online account opening. To open a VPF account, consult your organization’s HR department for application procedures.

PPF or EPF: Where should you invest this financial year?

Your choice between VPF and PPF should be based on eligibility, personal preferences, and long-term financial objectives, according to Karkera. If retirement planning is your goal, higher interest rates are favorable for better returns. With VPF offering 1% higher interest than PPF currently, it presents a compelling option for retirement savings, says Abhishek Kumar, a SEBI-registered RIA. If accessibility and flexibility are key considerations, PPF might be the more suitable choice despite the slightly lower interest rate, adds Karkera.