VPF STILL IN YOUR INTEREST
For risk-free retirement savings, the Voluntary Provident Fund now scores over the Public Provident Fund
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.