For risk-free re­tire­ment sav­ings, the Vol­un­tary Prov­i­dent Fund now scores over the Public Prov­i­dent Fund

India Today - - SMART MONEY - By Renu Ya­dav

Last month, the rate of in­ter­est for the Public Prov­i­dent Fund (PPF) was cut by 0.1 per­cent­age point to 7.9 per cent. While the fall­ing rates have cre­ated a dearth of tax­ef­fi­cient sav­ing in­stru­ments, the Vol­un­tary Prov­i­dent Fund (VPF) re­mains a good op­tion for the salaried to build a re­tire­ment cor­pus. VPF of­fers a higher rate of in­ter­est (8.65 per cent) and the con­tri­bu­tions are el­i­gi­ble for tax ex­emp­tion up to Rs 1.5 lakh un­der Sec­tion 80C of the In­come Tax Act.

What’s VPF? Mem­bers of the Em­ploy­ees’ Prov­i­dent Fund Or­gan­i­sa­tion (EPFO) in­vest 12 per cent of their salary (ba­sic plus dear­ness al­lowance) to­wards prov­i­dent fund, with a match­ing con­tri­bu­tion from the em­ployer. One can con­trib­ute more through VPF by in­ti­mat­ing the em­ployer.

Tax breaks: EPF, VPF and PPF fall un­der the Ex­emp­tEx­empt-Ex­empt (EEE) tax regime, i.e. your in­vest­ment, the in­ter­est earned on it dur­ing the ac­cu­mu­la­tion phase and the cor­pus at the time of with­drawal are taxfree. How­ever, ex­it­ing VPF be­fore five years makes the with­drawals tax­able.

In­vest­ment limit: There is no limit on VPF con­tri­bu­tions. But the em­ployer will not make any con­tri­bu­tion. PPF al­lows a max­i­mum in­vest­ment of Rs 1.5 lakh per ac­count per year.

In­ter­est rate: The in­ter­est rate for PPF is de­clared ev­ery quar­ter and is linked to yields from govern­ment se­cu­ri­ties of sim­i­lar ma­tu­rity, along with a mark-up of 0.25 per­cent­age point. The in­ter­est rate for VPF/ EPF is de­clared by EPFO at the end of the year. It is based on the in­come from its in­vest­ments, af­ter keep­ing some sur­plus.

Ac­count: VPF in­vest­ments go into your EPF ac­count, which has a Uni­ver­sal Ac­count Num­ber, al­low­ing smooth trans­fers when you change jobs. PPF ac­counts have to be opened with banks or at post of­fices.

Liq­uid­ity: Look at EPF as a re­tire­ment cor­pus and don’t park short-term funds in it. Par­tial with­drawals—for home loan re­pay­ment, ed­u­ca­tion or mar­riage of chil­dren—are al­lowed. The PPF has a ten­ure of 15 years, though par­tial with­drawals are al­lowed af­ter six years.


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