This article talks about various types of provident funds available for retirement planning. It also presents a comparative study between them.
Retirement planning is something that people should start from an early age. There are so many investment options to prepare yourself for retirement such as mutual funds, National Pension Scheme (NPS), Post Office Schemes, PPF, EPF, VPF, and so on. As provident fund schemes offer stable returns and high security, they are one of the most preferred investment instruments for retirement. Through provident schemes such as Employee Provident Fund (EPF), Public Provident Fund (PPF), and Voluntary Provident Fund (VPF), individuals can save money for their retirement. These schemes are ideal for long-term goals of saving for retirement planning. Let us understand the meaning and difference between these schemes to make an informed decision regarding investing in them.
Public Provident Fund (PPF)
PPF is a government-backed fixed income security scheme with an aim to provide retirement security to non-salaried employees (self-employed) and the unorganized sector. As PPF offers fixed returns, it is risk-free and gives assured stable returns. Anybody can contribute to PPF. Government sets and pays interest on PPF on a quarterly basis. The current interest rate on PPF is 7.1%. PPF also offers tax benefits to individuals as it falls under the Exempt-Exempt-Exempt (EEE) category, which means, money invested in PPF is exempted under Section 80C of the Income Tax Act,1961, and the interest earned on PPF is exempted from income tax. PPF is a long-term investment vehicle with a lock-in period of 15 years. A minimum of Rs. 500 annually must be invested in PPF by individuals, with the maximum annual investment allowable being Rs. 1.5 lakhs. Individuals investing in PPF can also avail loans against their PPF balance. Individuals can avail of this loan facility between the third and the sixth financial year of the opening of their PPF account.
Employee Provident Fund (EPF)
EPF is maintained by the Employees’ Provident Fund Organization (EPFO) and is a retirement benefits scheme. Contributions are made by both employee and employer on monthly basis into the EPF account in equal proportions. It is mandatory for salaried employees working under organizations registered under EPFO to contribute 12% of their basic pay + Dearness Allowance towards EPF. The 12% contribution made by the employer is bifurcated as 8.33% towards the Employees’ Pension Scheme (EPS) and the balance 3.67% towards EPF. It is also compulsory for any organization employing more than 20 workers to give EPF benefits to their workers. EPF interest rate is reviewed on annual basis by the government. The interest rate for the FY 2021-22 is set at the rate of 8.50% p.a. The amount deposited in the EPF account earns steady interest and is also eligible for tax deductions. EPF is a risk-free investment option that can be used for retirement planning.
Voluntary Provident Fund (VPF)
VPF is the voluntary contribution by employees towards their provident fund account. This contribution is over and above the 12% contribution by the employee towards their EPF. Any employee can contribute to the maximum extent of 100% of their basic pay + Dearness Allowance. VPF earns the same interest rate as the EPF account. There is no compulsion for employers to contribute to their employees’ VPF account. Also, an employee is under no obligation to contribute to VPF. But once the contribution is made in VPF, it cannot be terminated before the base tenure of 5 years is finished. As VPF is an extension of EPF, it is only available for salaried employees. VPF is considered a safe investment option with stable and high returns. It also offers certain tax benefits to the contributor.
PPF vs. EPF vs. VPF
| Basis | Public Provident Fund (PPF) | Employee Provident Fund (EPF) | Voluntary Provident Fund (VPF) |
| 1.
Applicability |
Anyone can open a PPF account. | Only salaried employees can open an EPF account. | Only salaried employees can open a VPF account. |
| 2. Contribution |
The contribution made to PPF is voluntary and can vary between Rs. 500 to Rs. 1.5 lakhs. | The minimum contribution to be made in EPF is 12% of basic pay + dearness allowance. | Under VPF, an individual can contribute any amount up to 100% of their basic pay + dearness allowance. |
| 3.
Returns |
The interest rate on PPF is revised on a quarterly basis and for the period October-December 2021, it is 7.10% p.a. | The interest on EPF is revised annually and for FY 2021-22 it is kept at 8.50% p.a. | The interest on VPF remains the same as that of EPF and thus currently it is 8.50% p.a. |
| 4. Investment Tenure |
The investment tenure for PPF is 15 years, after which individuals may extend it further in 5-year blocks. | EPF account remains active till the time individual retires or resigns from his job. In the event of a job switch, the account can also be transferred to the new employer. | VPF has the same investment duration as EPF. |
| 5.
Mandatory or Voluntary |
Investing in PPF is voluntary and at the discretion of the individuals. | Investing in EPF is mandatory for certain salaried employees. They have to contribute at least 12% of their basic pay + DA to the EPF account. | Contribution to VPF is voluntary and there are no such mandatory savings under this. |
| 6.
Employer Contribution |
Under PPF, there is no obligation for the employer to contribute. | Under EPF, employers have an obligation to contribute 12% of basic pay + dearness allowance. | Under VPF, employers have no obligation to contribute.
|
| 7.
Tax Benefits |
PPF contributions are allowed as deduction u/s 80C up to Rs. 1.5 lakhs p.a. and PPF returns are tax-free. | Maturity proceeds from EPF are tax exempted given the employee has serviced for more than 5 years. | Maturity proceeds from VPF are tax exempted given the employee has serviced for more than 5 years. |
| 8.
Loan Facility |
With PPF, individuals can take loans against their investment between 3-6 years of opening their PPF account. The maximum loan allowable is 25% of the PPF balance in the preceding year of the loan. | EPF allows individuals to apply for loans up to 100% of their investment. | VPF allows individuals to apply for loans up to 100% of their investment. |
| 9.
Withdrawal Facility |
PPF account is maintained for a minimum of 15 years and only partial withdrawal is allowed subject to certain terms and conditions | EPF can be withdrawn completely or partially. Complete withdrawal is allowed in event of retirement or unemployment for more than 2 months. Partial withdrawal is allowed only under certain specific circumstances. | VPF account can be withdrawn fully and conveniently. However, if withdrawn before the completion of 5 years, the amount shall be taxed. |
Summary
Each of the provident funds has its own merits and limitations. If you are a salaried employee, you will mandatorily have to invest in EPF. But if you wish to increase your retirement portfolio, you can certainly invest in PPF and VPF as well. If you are a non-salaried employee, you should definitely invest in PPF to secure money for your retirement.