Difference between PPF and VPF. Where should you invest?

The Public Provident Fund (PPF) and the Voluntary Provident Fund (VPF) are robust 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 improper financial planning decisions. Want to avoid the situation? No worries. We are here to clear the dark clouds of confusion.

Voluntary Provident Fund (VPF) and the Public Provident Fund (PPF)

Many people often get confused between PPF and VPF, mainly because of the similarities they share. However, there are some specific differences that one needs to understand between the two in order to understand them better and make sound financial decisions. One of the biggest points of differences between the two is the fact that the Public Provident Fund (PPF) can be accessed by people working in the unorganized sectors and self-employed individuals. However, this is not the case for the Voluntary Provident Fund, as it can only be accessed by people who are salaried employees.

How does a VPF account work?

The Voluntary Provident Fund account is one of the most significant investment options for salaried employees. Through this option, a salaried individual is able to save more towards retirement, other than the compulsory deduction of 12% of the basic salary. An important aspect to note here is that only salaried employees are eligible to access the 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?

The PPF is a popular investment scheme created for both self-employed individuals, as well as workers working in the unorganized sectors. The purpose is to offer them income security in old age. Much to the preferences of many, the PPF is a fixed income security scheme. The scheme makes one able to invest a maximum amount of Rs. 1,50,000 and a minimum amount of Rs. 500. One can get tax-free and guaranteed returns 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 and a PPF account. People working in the unorganized sector and any self-employed person are eligible to open a PPF account. However, in the case of a VPF account, only salaried employees are eligible to open the account. 

The second point of discussion here could be the interest offered. In the case of a VPF account, the interest offered is 8.5%, which is similar to that of an EPF account. However, in the case of a PPF account, the interest rate offered is a bit less, which is 7.1% on your savings.

The returns received too are important factors to discuss. The returns one gets in the case of a PPF account are free from all income taxes. On the contrary, contributions directed in the case of a VPF account have to go through tax deductions, as per Section 80C of the Income Tax Act, 1961.

Finally, the maturity period! One cannot withdraw the deposited amount in the case of a PPF account unless the account matures. In the case of a PPF account, the maturity period is 15 years. However, in the case of a VPF account, the employers are free to withdraw the funds whenever they need or wish to. There is a condition to consider here. In case an employee withdraws the funds prior to the completion of 5 years of the VPF account the amount will be taxed.

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