The public provident fund and the lesser-known voluntary provident fund are good vehicles to save on taxes and build a retirement kitty. How do these vary?

Contributions

In both the voluntary provident fund (VPF) and the public provident fund (PPF), the contributions you make are voluntary. But the manner in which these are made varies.

In a VPF, the contribution is a proportion of your salary. Remember the amount that goes from your salary every month to the employee provident fund (EPF)?

Over and above the mandated 12 per cent of your salary that goes there, you can specify an additional percentage.

This sum, deducted every month from your salary, is parked in the VPF. So, both the EPF and VPF amounts go into your EPF pool. While your employer will match the portion that goes into the EPF, the employer will not match this additional amount. Salary here is your basic pay plus dearness allowance. As long as you don’t reduce the proportion, savings rise along with your pay hikes.

In contrast, under the PPF, there is no fixed periodicity. You can make your entire investment in a lumpsum, or as periodic payments spread through the year.

The amount invested is not linked to your salary.

Contributions made to the two schemes fall under Section 80C where you can claim tax benefits for certain investments/spends up to ₹1 lakh. But the VPF scores over the PPF in one important aspect here. In the VPF, you can invest any amount you wish to. In a PPF, you cannot invest more than ₹1 lakh a year, whether or not you claim tax deductions.

Returns and tax benefits

Interest rate on VPF is the same as that of EPF , and is fixed by the Employees’ Provident Fund Organisation. For 2013-14, the interest paid out was 8.75 per cent. But it is subject to change by the EPFO each year.

At the moment, this rate is a whisker above the PPF rate of 8.7 per cent for 2013-14. However, since the PPF rate is linked to the 10-year Government bond yields, the PPF’s returns can fluctuate with the market, unlike that of the VPF, which is not market linked. The initial investment, interest earned and maturity amounts are tax-free. Hence, both these instruments make great vehicles to build a retirement kitty.

Loans and withdrawals

If you’re really in need of money, withdrawing is less restrictive in the case of VPF than PPF, which brings up the third way in which VPF scores. PPF accounts need to be held for a period of 15 years, and allow only partial withdrawal. VPF accounts can be closed and the sum withdrawn if you intend to stop working. If you have worked for less than five years, this withdrawal will be taxed. VPF is the easier option for loans too.

The bottomline

But VPF has drawbacks too. It can be opened only by a salaried individual. A PPF account, on the other hand, can be opened by just about anyone. There is no beating the PPF when it comes to safe and good investments if you don’t belong to the salaried class. If you are salaried and have a PPF account, start a VPF in addition to your PPF.

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