Public Provident Fund (PPF) and Voluntary Provident Fund (VPF) are sound financial instruments provided by the Government of India to help you save for retirement. However, many of us get confused between the two, which can sometimes lead us to make poor financial planning decisions. Do you want to avoid the situation? No problem. We are here to clear the dark clouds of confusion.
Voluntary Provident Fund (VPF) and Public Provident Fund (PPF)
Many people are often confused between PPF and VPF, mainly because of the similarities they share. However, there are some specific differences that you need to understand between the two in order to better understand them and make sound financial decisions. One of the biggest points of difference between the two is the fact that people working in unorganized sectors and the self-employed can access the Public Provident Fund (PPF). However, this is not the case with the Voluntary Provident Fund, since only people who are salaried can access it.
How does a VPF account work?
Voluntary Provident Fund account is one of the most important investment options for wage earners. Through this option, an employee can save more for retirement, in addition to the mandatory deduction of 12% of the base salary. An important aspect to note here is that only salaried employees are entitled to access Voluntary Provident Funds. However, no employer can force the employee to invest in Voluntary Provident Funds (VPF). As the name suggests, this investment option is a voluntary action that any employee can take.
How does a PPF account work?
PPF is a popular investment scheme created for both self-employed people and workers working in unorganized sectors. The goal is to offer them income security in old age. For the preferences of many, the PPF is a fixed income security plan. The plan allows investing a maximum amount of Rs. 1,50,000 and a minimum amount of Rs. 500. Guaranteed and tax-free returns can be earned with a PPF account.
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Differences between PPF and VPF
The first point of difference to consider would be who is eligible to open a VPF account and a 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 the account.
The second point of discussion here could be the interest offered. In case of a VPF account, the interest offered is 8.5%, similar to that of an EPF account. However, in case of a PPF account, the interest rate offered is a little lower, which is 7.1% on your savings.
The returns received are also important factors to discuss. The returns earned in the case of a PPF account are free of all income tax. On the contrary, directed contributions in the case of a VPF account must go through tax deductions, according to section 80C of the Income Tax Act, 1961.
Finally, the maturity period! The amount deposited in case of PPF account cannot be withdrawn unless the account matures. In case of a PPF account, the maturity period is 15 years. However, in the case of a VPF account, employers are free to withdraw the funds whenever they need or want. There is a condition to consider here. In case an employee withdraws the funds before completing 5 years of the VPF account, the amount will be subject to tax.
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Source: ptivs2.edu.vn