Retirement planning has become the most talked about topic among people as young as 25. With so many investment options (Mutual Funds, Equity, ULIPs, NPS, Post office schemes, PPF, EPF Pension Plans etc.) coming up, it is becoming more difficult for youngsters to zero in on the most suitable retirement option. Going by the low risk average return (and vice versa) rule, the young population considers it wise to prefer EPF, VPF and PPF over all other options for investment/retirement. Let us understand why:
EPF, VPF and PPF: The Basics
EPF (Employee Provident Fund) – It is a provident fund created with a purpose to provide financial security and stability in future. Under this plan employees a save fraction of their salaries every month so that they can use it later at the time of retirement. It is mandatory for salaried people working in organizations registered under the Employees’ Provident fund Organization (EPFO) to contribute either 12% of their Basic + Dearness Allowance or Rs.780 towards EPF. There is more, the employee alone doesn't contribute 12% of their salary, the employer as well contributes the same amount. Participation in EPF is mandatory for Employers who have more than 20 workers and for workers whose basic salary is more than Rs. 6,291. Also, the saved amount earns interest and is also eligible for tax deduction. The most attractive feature about EPF is that it is risk free and could be chosen as an investment tool to be used after retirement.
VPF (Voluntary Provident Fund) – As the name suggests, the employee availing VPF scheme can voluntarily contribute any percentage of his salary to the Provident fund account. Although, the contribution must be more than the PF ceiling of 12% that has been mandated by the government. The employer however is not obligated to contribute any amount towards VPF. An employee can contribute 100% of his basic salary and DA. Interest offered would be the same as EPF and this amount would be credited to EPF Scheme account only as there is no separate account for VPF.
PPF (Personal Provident Fund)
Personal Provident Fund - It is a A government-guaranteed fixed income security scheme with the special objective of providing old age financial security to the unorganized sector/ self employed (non-salaried employees). Everyone can contribute to PPF account and get risk free and assured returns. The interest earned on the PPF subscription is compounded; that means you not only earn interest in the money you put in, but you earn interest on the interest earned too. All the balance that accumulates over time is exempt from wealth tax.
Which one is better?
Now, that we have understood what PPF, EPF and VPF are, we need to find out, which is the one that stands out among all. A one on one comparison (between the 3 products) using factors like Eligibility, contribution, tax benefits, returns, withdrawal facility etc. would help us understand the pros and cons of each of them. This comparison would come handy while taking a decision regarding these products. Let us see how:
|EPF (Employee’s Provident Fund)||VPF (Voluntary Provident Fund)||PPF (Personal Provident Fund)|
|Opening Account||Employees in India (Salaried Individuals)||Anyone except NRI’s|
|Interest Rate||8.75% p.a.||8.75% p.a.||8.7% p.a.|
|Tax Benefit||Up to Rs. 1 Lakh per year under Sec 80C|
|Period of Investment||Up to retirement or resignation, whichever is earlier||15 years|
|Loan Availability||Partial withdrawals available||50% withdrawal after 6 years|
|Employer Contribution on Basic + DA||12%||NA||NA|
|Employee Contribution on Basic + DA||12%||Voluntary||NA|
|Taxation on Maturity Returns||Tax Free||Tax Free||Tax Free|
People from unorganized sector including non-salaried employees are eligible to open a PPF account either at bank or in Post Office and earn the same assured high returns. While VPF and EPF scheme can only be availed by salaried individuals. VPF subscribers can contribute any amount over the necessary 12% which will be contributed in EPF account.
Besides EPF, both in VPF and PPF the contribution is voluntary. Only salaried individuals can sign up for VPF whereas PPF is for both salaried and non salaried individuals. An employee who wants to increase his retirement savings can tell the employer to deduct a certain percentage above the necessary 12% of basic pay and dearness allowance that goes towards EPF account. An employee can contribute around 100% of basic pay and dearness allowance towards VPF account (part of EPF). For VPF, the employer is not bound to contribute any amount.
Talking about the magnitude of contribution in each of the schemes, PPF account has an upper limit of Rs.1 lakh per year, whereas there is no such limit in case of VPF contribution. Also, one can contribute either a lump sum amount in the PPF account or distribute the investment amount into periodic payments.
Presently, PPF account is offering an interest rate of 8.7%. However, since the interest rate on PPF is linked to 10-year government bond yields, it may change depending on the market but as government bonds are generally among the least risky financial products, the returns generally remain favorable. On the other hand, interest rate on VPF is not linked to G-bond yield and is the same as offered on EPF account. For the financial year, 2014-2015, EPF has fixed the rate at 8.75% which is only slightly greater than PPF rate.
Maturity proceeds from EPF/VPF are tax exempted only if the employee has serviced the company for a continuous period of 5+ years. If he/she quits before completing 5 years, then the maturity returns would attract some tax. PPF returns on the other hand are tax free.
VPF: Amount is payable at the time of retirement or resignation. Or, it can also be transferred from one employer to another if one switches jobs. On death, the accumulated balance is paid to the legal heir.
PPF: Amount can be withdrawn only on maturity, that is, after 15 years of the end of the financial year in which the product gets associated with a person.
In case of the PPF account that is to be maintained for a minimum of 15 years, only partial withdrawal is allowed subject to some terms and conditions The account can further be extended for another 5 years. However, the money from a VPF account can be fully and conveniently withdrawn. Further, if withdrawal from the VPF account happens prior to completing 5 years of service with the employer, then that amount would be taxed.
For EPF/VPF, one can apply for a loan and also withdraw their complete investment, whereas, in PPF loans only 50% of the available balance at the end of 4th year can be withdrawn after the onset of the 6th year. In other words, full amount cannot be withdrawn.
The investment options EPF, VPF and PPF have their own merits and demerits. From the above comparison we can observe that EPF and VPF score over PPF in terms of Return on investment, Employer Contribution, Liquidity. But we also know that EPF and VPF cannot be subscribed to by self-employed and employees in un-organized sector, therefore PPF is a better choice.
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