EPF vs PPF vs VPF – Difference, Formula, Returns & Taxation
In recent years, many working individuals are actively considering options and discussing retirement plans which have a lot to do with increased financial literacy. Most of us have spent many hours fantasizing about our retirement plans like living far away from the city buzz, going on trips, and much more. After a certain age, we’ve faced with the responsibility of looking after our parents financially but we fail to understand that the same fate awaits our future generations. When considering EPF vs PPF vs VPF, there are stark differences between them.
Therefore, it is important to stack up our monetary finances against the available options of retirement funds like EPF (Employee Provident Fund), PPF (Public Provident Fund) & VPF (Voluntary Provident Fund). Let’s begin to understand what they are and how they affect us.
EPF vs PPF vs VPF: The Basics
What is EPF?
EPF, or Employee Provident Fund, is a retirement savings scheme for employees in India. It is a portion of your salary that you and your employer contribute every month. The money you put into EPF is meant to grow over time and provide financial security for your retirement. EPF offers tax benefits and the accumulated amount can be withdrawn when you retire or meet certain conditions.
What is VPF?
VPF (Voluntary Provident Fund) is an additional saving option for salaried individuals in India. It allows employees to contribute more than the mandatory 12% of their basic salary towards their provident fund. Considering VPF vs EPF, they both carry the same interest rates i.e. currently 8.5%.
What is PPF?
PPF, or Public Provident Fund, is a government-backed savings scheme in India open for all individuals for any sector of the economy, unlike VPF. Any citizen living in India can open a PPF account be it a student, self-employed individual, salaried employee, retired, etc. The VPF vs PPF interest rate poses a crucial area of difference.
EPF vs VPF vs PPF – What’s the Difference?
| Parameters | EPF (Employee Provident Fund) | VPF (Voluntary Provident Fund) | PPF (Public Provident Fund) |
| Type | Employer-sponsored | Government-backed | Voluntary |
| Purpose | Retirement savings | Retirement savings | Additional savings |
| Contributions | Employee and employer | Individual | Employee |
| Interest Rate | 8.15% | 8.5% per annum | 7.1% |
| Maximum Contribution | 12% of the basic salary + DA | ₹1.5 lakh per year | Additional voluntary amount |
| Withdrawal | Upon retirement/employment termination | After 15 years | Can be withdrawn anytime |
| Tax Benefits | Tax-free growth and contributions | Tax-free growth and contributions | Tax-free growth and contributions |
| Flexibility | Limited flexibility | Maximum flexibility | Maximum flexibility |
| Risk Profile | Safe and backed by the government | Safe and backed by the government | Safe and backed by the government |
Eligibility Criteria for EPF vs PPF vs VPF
The eligibility criteria for the following PPF vs EPF vs VPF are as follows:
PPF (Public Provident Fund)
- Individual Eligibility: Any resident individual, including salaried employees, self-employed individuals, and even minors with a guardian, can open a PPF account.
- Age Limit: There is no specific age limit for eligibility.
- Citizenship: Only Indian citizens are eligible to open a PPF account.
EPF (Employee Provident Fund)
- Eligible Employees: All employees working in establishments with 20 or more employees are eligible for EPF. However, in some cases, establishments with fewer than 20 employees may also be covered under certain conditions.
- Salary Criteria: Employees with a basic salary of up to ₹15,000 per month must contribute to EPF. For employees earning above this threshold, it is optional.
- Age Limit: There is no specific age limit for eligibility.
VPF (Voluntary Provident Fund)
- Eligible Employees: VPF is an extension of EPF, so the eligibility criteria for EPF apply. Employees who are eligible for EPF can choose to contribute voluntarily to VPF.
- Salary Criteria: VPF contribution examples are voluntary, but they are subject to the same salary criteria as EPF, where employees with a basic salary of up to ₹15,000 per month must contribute to EPF.
- Age Limit: There is no specific age limit for eligibility.
Investment Period
The investment period for every scheme is quite different. Let’s have a look.
- Withdrawal Facility: In the case of EPF accounts, employees can take partial withdrawals for specific purposes like education, housing, marriage, etc. For complete withdrawal, the entire PPF amount can be withdrawn upon maturity, which is after 15 years from the end of the financial year of account opening. However, in the case of a PPF account, it is to be maintained for 15 years and can be withdrawn in partial amounts subject to certain conditions. The account can be extended for another five years. VPF does not have a separate withdrawal facility since it is a part of EPF. The withdrawal rules for EPF apply to the VPF amount as well.
- Loan Facility: Unlike PPF loans, one can withdraw their entire investment after the onset of the 6th year for VPF vs EPF loans, while only 50% of the available balance at the end of the 4th year is withdrawable in PPF loans. In other words, the full amount cannot be withdrawn.
Maturity Period
Here are the different maturity periods of EPF vs PPF vs VPF:
- EPF (Employee Provident Fund): The EPF maturity period is typically 15 years from the date of opening the account. EPF lock in period is 5 years. The Maturity period is the major difference between EPF vs PPF. Thus, the accumulated funds, including the principal and interest, can be withdrawn upon retirement, resignation, or after two months of unemployment.
- PPF (Public Provident Fund): The maturity period for PPF is 15 years from the end of the financial year in which the account was opened. It is another major difference between VPF and PPF. Moreover, a PPF subscriber can extend their 15-year lock in period.
- VPF (Voluntary Provident Fund): VPF does not have a separate maturity period. VPF lock in period is the same as EPF lock in period. It is an extension of the EPF and follows the same maturity period of 15 years. Individuals can choose to transfer their EPF account when they change employers which makes it a crucial point of difference between VPF vs PPF.
Tax Implications
Let’s discuss the tax implications of each:
EPF (Employee Provident Fund)
EPF is a mandatory retirement savings scheme in India, applicable to employees in organizations with 20 or more employees. The tax implications of EPF are as follows:
- Contributions: Both the employee and the employer contribute 12% of the employee’s basic salary plus dearness allowance to the EPF. The employee’s contribution is eligible for a tax deduction under Section 80C of the Income Tax Act, up to a maximum limit of ₹1.5 lakh per year.
- Interest: The interest earned on EPF contributions is tax-free.
- Withdrawals: EPF withdrawals are subject to tax rules. If the employee withdraws the EPF balance before completing five years of continuous service, the withdrawn amount is taxable. However, if the employee withdraws after five years of continuous service, the withdrawal is tax-free.
PPF (Public Provident Fund)
PPF is a long-term savings scheme offered by the Indian government. The tax implications of PPF are as follows:
- Contributions: Contributions made to the PPF account are eligible for a tax deduction under Section 80C of the Income Tax Act, up to a maximum limit of ₹1.5 lakh per year.
- Interest: The interest earned on PPF contributions is tax-free.
- Withdrawals: PPF has a lock-in period of 15 years. Upon maturity, the entire PPF balance, including interest, can be withdrawn tax-free.
VPF (Voluntary Provident Fund)
VPF, similar to EPF, belongs to the EEE or Exempt-Exempt-Exempt category. The VPF maximum limit is the same as EPF. The tax implications of VPF are similar to EPF since VPF contributions are part of the EPF. VPF contributions are eligible for a tax deduction under Section 80C, subject to the overall limit of ₹1.5 lakh per year.
What Factors You Must Consider Before Choosing EPF vs PPF vs VPF?
When deciding between EPF, PPF, and VPF, there are several factors to consider. Here are some important factors to help you make an informed decision:
Employment Status
EPF is available to salaried individuals through their employers, while PPF is open to both salaried and self-employed individuals. VPF is an extension of EPF and is only available to salaried individuals. Consider your employment status and eligibility for each option.
Contribution Limits
EPF has a mandatory contribution limit of 12% of the employee’s basic salary plus dearness allowance. PPF allows contributions up to a maximum limit of ₹1.5 lakh per year. VPF enables employees to contribute more than the mandatory 12% limit in EPF but within overall Section 80C limits.
Employer Match
EPF involves both employee and employer contributions, with the employer matching the employee’s 12% contribution. This can be advantageous as it increases your retirement savings. Consider the employer match aspect while evaluating EPF.
Withdrawal Rules
EPF has specific withdrawal rules, with tax implications based on the withdrawal period. PPF has a lock-in period of 15 years and premature withdrawals. Evaluate the withdrawal rules of each scheme and consider your long-term investment goals.
Flexibility
EPF and VPF contributions are made through salary deductions, providing automatic savings. PPF contributions can be made at your convenience, allowing more flexibility. Consider the level of flexibility you prefer in managing your contributions.
Interest Rates
VPF vs EPF vs PPF interest rates are subject to periodic revisions. Stay updated on the prevailing interest rates for each scheme and assess the potential growth of your investments.
Risk Profile
EPF and PPF are considered relatively safe investment options backed by the government. VPF, being an extension of EPF, carries similar risk characteristics. Assess your risk tolerance and investment preferences.
Long-Term Financial Goals
Consider your long-term financial goals, such as retirement planning or other specific objectives. Evaluate how EPF, PPF, or VPF align with your goals and help you achieve them.
Tax Implications
EPF, PPF, and VPF offer tax benefits, but the rules and tax treatment may differ. Understand the tax implications, including deductions for contributions and tax treatment of withdrawals, to assess the overall tax efficiency of each scheme.
What are the Benefits of Investing in EPF vs PPF vs VPF?
Investing in retirement schemes like EPF (Employee Provident Fund), PPF (Public Provident Fund), and VPF (Voluntary Provident Fund) offers several general benefits. Here are some key advantages of investing in these schemes:
Tax Benefits
EPF, PPF, and VPF provide tax benefits, making them attractive investment options. Contributions made to these schemes are eligible for a tax deduction under Section 80C of the Income Tax Act, up to a maximum limit of ₹1.5 lakh per year.
Long-Term Savings
These schemes promote long-term savings, encouraging individuals to build a substantial corpus for retirement. By contributing regularly over a period, investors can accumulate a significant amount of funds to meet their post-retirement financial needs.
Secure and Government-Backed
EPF, PPF, and VPF are secure investment options as they are backed by the government. These schemes provide a reliable and stable platform for individuals to invest their savings, minimizing the risk associated with market volatility.
Compounding Benefits
EPF, PPF, and VPF offer the advantage of compounding returns. The interest earned on the contributions is reinvested, leading to exponential growth over time. The longer the investment period, the greater the compounding benefits.
Retirement Planning
Investing in these schemes helps individuals plan for their retirement. By consistently contributing to EPF, PPF, or VPF, individuals can build a retirement corpus that provides financial security and stability during their post-employment years.
Employee-Employer Contributions (EPF)
EPF involves both employee and employer contributions. The employer matches the employee’s 12% contribution, thereby boosting the overall retirement savings. This employer match serves as an additional benefit and increases the accumulation of funds over time.
Flexibility (PPF and VPF)
PPF and VPF provide flexibility in terms of contribution amounts and timing. While PPF has a fixed annual contribution limit of ₹1.5 lakh, VPF allows employees to contribute more than the mandatory 12% of their basic salary.
Which Savings Option is the Best Among EPF vs VPF vs PPF?
Calculating the exact amount of money you could save by investing in each scheme would depend on various factors. However, to provide a general example, let’s assume a monthly salary of ₹50,000 and a contribution percentage of 12% for EPF and VPF. Here’s an example of potential savings over a 10-year period:
Assumptions
- EPF contribution: 12% of basic salary + DA (Rs. 40,000)
- VPF contribution: Additional 5% of basic salary + DA (Rs. 2,000)
- PPF contribution: ₹5,000 per month
The calculations are as follows:
- EPF (Employee Provident Fund):
EPF contribution per month: ₹40,000 x 12% = ₹4,800
Annual EPF contribution: ₹4,800 x 12 = ₹57,600
- VPF (Voluntary Provident Fund):
VPF contribution per month: ₹2,000
Annual VPF contribution: ₹2,000 x 12 = ₹24,000
- PPF (Public Provident Fund):
PPF contribution per month: ₹5,000
Annual PPF contribution: ₹5,000 x 12 = ₹60,000
Over a period of, let’s say, 10 years, the total savings would be:
- EPF:
Total EPF contribution over 10 years: ₹57,600 x 10 = ₹5,76,000
- VPF:
Total VPF contribution over 10 years: ₹24,000 x 10 = ₹2,40,000
- PPF:
Total PPF contribution over 10 years: ₹60,000 x 10 = ₹6,00,000
| Provident Fund Type | Monthly Contribution | Annual Contribution | Total Contribution over 10 Years |
|---|---|---|---|
| EPF (Employee Provident Fund) | ₹4,800 | ₹57,600 | ₹5,76,000 |
| VPF (Voluntary Provident Fund) | ₹2,000 | ₹24,000 | ₹2,40,000 |
| PPF (Public Provident Fund) | ₹5,000 | ₹60,000 | ₹6,00,000 |
Ultimately, the best savings option for you will depend on your individual circumstances and goals. However, if you are looking for a secure and tax-efficient way to save for retirement, you can start with investing in EPF and then look out for the other two schemes as it could be a good option for you.
What are the Associated Risks?
Here are some of the general risks associated with investing in EPF, PPF, and VPF:
- Market Risk: The value of your investment in these schemes can go down if the stock market crashes. However, this risk is relatively low as these schemes are invested in a diversified portfolio of assets.
- Inflation Risk: The value of your investment in these schemes can go down if inflation rises. This is because the interest rate on these schemes is fixed and does not keep pace with inflation.
- Liquidity Risk: It can be difficult to withdraw your money from these schemes immediately. There are certain lock-in periods associated with these schemes.
- Government Risk: The government can change the rules of these schemes at any time. This could impact the returns you earn on your investment.
Here’s How You Can Reduce the Risks
- Invest for the Long Term: The longer you invest, the more time your money has to grow and the less impact any short-term fluctuations will have on your returns.
- Diversify Your Investments: Don’t put all your eggs in one basket. Spread your money across different asset classes, including stocks, bonds, and real estate.
- Rebalance Your Portfolio Regularly: As your financial situation changes, you may need to rebalance your portfolio to ensure that it still meets your needs.
- Don’t Panic Sell: If the market takes a downturn, don’t panic and sell your investments. Remember that the market will eventually recover.
To Wrap It Up…
EPF, PPF, and VPF have their pros and cons. They are governed by different rules and offer distinct advantages. Nevertheless, it is ideal to gain a deeper understanding of EPF, VPF, and PPF to ensure a smooth post-retirement journey.
FAQs
Salaried employees can use VPF accounts, while self-employed and unorganized sector individuals can open PPF accounts. VPF and EPF offer 8.5% interest, while PPF offers 7.1%.
Only salaried employees with an existing EPF account and monthly salary payments are eligible to open a VPF account because the VPF scheme extends from the EPF.
VPF accounts cater exclusively to salaried employees, whereas PPF accounts are open to self-employed individuals and those in unorganized sectors. VPF and EPF accounts provide the same interest rate at 8.5%, while PPF accounts offer a 7.1% interest rate on savings.
If you’re in a higher income tax bracket and seek to invest a substantial amount in tax-free fixed income options for long-term goals, you can utilize both VPF and PPF concurrently.
Employees participate in EPF, a retirement savings scheme, and can voluntarily contribute to their EPF through VPF. Individuals can invest in tax-free PPF for retirement, but EPF and VPF withdrawals are taxable within five years of service.
No. Employees participate in the Employee Provident Fund (EPF), and they have the option to make voluntary contributions through the Voluntary Provident Fund (VPF). Additionally, individuals have the opportunity to invest in the Public Provident Fund (PPF).
