VPF Or PPF: Where Should I Invest Post Budget Update?
As an investor you may always experience a debate as to where I should invest i.e. in a Voluntary Provident Fund (VPF) or the Public Provident Fund(PPF) when it falls to secure fixed income investment opportunities. Both the Voluntary Provident Fund (VPF) and the Public Provident Fund (PPF) are common tax-saving strategies regulated by the Income Tax Act under the section 80C. If you're not clear as an investor about which of the two is a good bet. First of all, let me make it clear in brief that both provide lucrative returns vary in factors such as eligibility, deposit period, return, possibilities for liquidity, tax treatment, and so on. But this is just the beginning, let us glance both in depth below and sum up with the best.
A glance at VPF
An extension of the Employees' Provident Fund(EPF) is the Voluntary Provident Fund (VPF). Employees working in registered companies are required to contribute 12% of their basic salary under EPF. Unless the employee retires or is entitled to make a premature withdrawal under a certain provision the contributions towards EPF is locked-in. Voluntary Provident Fund (VPF) here plays the role of an extension which means that if an employee wants to contribute more above the stated limit he or she can do so by considering VPF but the contribution by your employer will be the same.
A glance at PPF
One of the most prominent tax-saving strategies under the provisions of Section 80C is the Public Provident Fund (PPF). All types of resident individuals whether unemployed, minors or employed in an unorganised sector can invest in PPF. By investing in PPF, taxpayers can seek tax exemptions of up to Rs 1,50,000 in a fiscal year. In a year, the minimum contribution cap is restricted at Rs 500 up to an upper limit of Rs 1.5 lakh. The returns provided by PPF are set and covered by sovereign guarantees.
Returns
For the quarter ending March 2021, the present rate provided on PPF is 7.1 per cent. For the current 2020-21 financial year, the interest rate for the EPF is yet to be announced. The interest rate on the EPF has been placed at 8.5% for the 2019-20 fiscal year. The odds of receiving a stronger interest rate are good with the above depending on the historical interest rates provided by both the PPF and the VPF.
Minimum and maximum contribution limit
You have to contribute a minimum of Rs 500 and up to an upper limit of Rs 1.5 lakh towards PPF. Your account will become 'inactive' if you fail to make the minimum contribution amount per year. Such restriction of minimum or maximum contribution does not exist for VPF. The overall contribution in EPF and VPF combined, though, is restricted to 100% of your basic salary plus dearness allowance.
Tenure
Under PPF, the investment period is fifteen years which can be further extended to a block of 5 years. On the other side, VPF is known to be among the best retirement funds, so all the EPF withdrawal guidelines always apply to VPF. After superannuation, you can withdraw the entire EPF corpus. One needs to retire from employment after hitting 55 years of age in order to receive the final EPF settlement.
Tax treatment post budget update 21-22
VPF also promises deductions under section 80C of the Income-tax Act, 1961 up to Rs 1.5 lakh in a particular fiscal year when it comes to tax-free benefit on the deposit amount, much like EPF. This exemption is also offered by PPF. VPF also promises deductions under section 80C of the Income-tax Act, 1961 up to Rs 1.5 lakh in a particular fiscal year when it comes to tax-free benefit on the investment number, much like EPF. This exemption is also offered by the PPF, too. That being said, there are variations in the tax treatment of returns received on these two investment vehicles. For PPF, the overall return received is exempted from taxation, but not more than Rs 1.5 lakh can be invested per year. There is a proposal in Budget 2021 to restrict the deduction on return received on VPF. In compliance with the proposal, if the contribution in the VPF and the EPF placed together in the financial year crosses Rs 2.5 lakh, the returns received on the contribution exceeding Rs 2.5 lakh will not be exempted from taxation.
Premature withdrawal facilities
After five years from the end of the fiscal year in which the first contribution is rendered the PPF facilitates partial withdrawal. From three years to six years from the account opening date, you can even get a loan against your PPF account. In the event of unemployment for more than two months, the entire VPF amount can well be withdrawn. For many particular reasons, such as medical emergencies, building or purchasing of a new house, house reconstruction, home loan settlement and marriage, you can make a partial withdrawal.
Our take
As we all know that Budget 2021 introduced levying tax on interest received on an individual's contribution over Rs 2.5 lakh to a provident fund in a fiscal year. On a straightforward interpretation of the budget statements, it brings to us that the interest received on contributions made to the Employees' Provident Fund (EPF), the Voluntary Provident Fund (VPF) and the Public Provident Fund (PPF) will be subject to taxation. That being said, in the context of EPF and VPF contributions, in order to benefit from tax exemption on interest received on EPF and VPF contributions, the amount of contributions to both EPF and VPF should not surpass Rs 2,5 lakh in a fiscal year. If in a fiscal year, the cumulative contribution of an employee to EPF and VPF together crosses Rs 2.5 lakh in a financial year, the interest received on the additional contribution will be taxable to the employee. PPF contribution is classified under Section 10(11) of the Income Tax Act, which within the year can not surpass Rs. 1.5 lakh. Consequently, interest accrued on the PPF balance will still appear tax-free as the contribution to PPF will not surpass Rs. 2.5 lakh for any fiscal year as specified under the Budget update 21. Moreover, it is important to consider the contribution to each provident fund individually and not in bulk.
Provident fund contributions for non-government employees and the deduction for withdrawal of this accumulated balance is granted under Section 10(12) of the Income Tax Act. In order to earn income tax benefits, i.e. tax-free interest under Section 80C, when such employees make a contribution to their Public Provident Fund (PPF) account, the deduction for withdrawal of this corpus is granted under Section 10(11). It is possible to open a PPF account at approved branches of the Post Office and banks. Most of the banks such as SBI already have the service to open an online PPF account where holders can even make deposits online. You need to contact your organization's HR department to register for VPF. One that provides you with the best return at the lowest cost is a successful investment opportunity. Both the VPF and the PPF have a sovereign guarantee, but there is no distinction in terms of risk. Both are known to be secure investment strategies for regular income. If you are willing to make a stable retirement fund VPF can be a good bet for you whereas PPF will be the best if you are going to save your child's education, marriage, medical issues and so on. In case you have a higher tax slab rate and are trying to contribute higher amounts for tax-free gains, both alternatives can be considered at a time.