VPF Vs PPF: Which is better in 2020?

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Voluntary Provident Fund or Public Provident Fund in 2020. 

Difference between VPF Vs. PPF and how to choose between the two?

This was a dilemma when even I joined my salaried job for the first time more than a decade ago.

And it’s still a very commonly-asked question among salaried individuals in India. People compare PPF with VPF and keep searching for answers to questions like:

  • Is VPF better than PPF?
  • Is it good to invest in VPF instead of PPF?
  • Is PPF better than VPF?
  • Is it good to invest in PPF instead of VPF?
  • Is it better to invest in PPF instead of VPF?
  • Is it better to invest in VPF instead of PPF?
  • VPF Vs. PPF: Which is better for tax saving?
  • PPF Vs. VPF
  • VPF Or PPF or maybe PPF Or VPF?

Different questions. Same agenda.

All these questions are similar and basically focused on picking between the two provident fund investment options of PPF (Public Provident Fund) Or VPF (Voluntary Provident Fund).

There is absolutely no doubt that when it comes to saving in low-risk products in India, provident funds (PF) are the most popular options among Indians in 2020. Between the 3 types of PF schemes – Employee Provident Fund (EPF), Voluntary Provident Fund (VPF) and Public Provident Fund (PPF) schemes, people have the option to save money for the long term in a tax-free manner.

Though there seem to be 3 types of provident funds, the fact is that EPF (Employee Provident Fund) and VPF (Voluntary Provident Fund) are similar and linked to each other.

So the idea of this article is basically to compare VPF with PPF and help you choose between VPF or PPF.

And by the end of it, it may not remain a discussion limited to VPF Vs PPF kind of debate. As you may realize, both have their own good and not-so-good points. So the actual choice of picking between VPF or PPF will boil down to individual investor’s unique requirements.

So let’s get going and see how PPF and VPF differ from each other and what factors you should consider before picking one of them.

VPF Vs. PPF: Differences

Both are risk-free financial savings instruments offered and backed by the Government of India. And ideally, both are best suited for very long term financial goals like retirement. PPF stands for Public Provident Fund while VPF stands for Voluntary Provident Fund. And by investing in PPF vs VPF, the investors can get assured returns on their contributions.

Let me highlight the differences between the two now:

VPF vs PPF: Who Can Open Account & Contribute?

The VPF contributions can be made only by those who are already saving money in their EPF accounts. And since the EPF is only available for the salaried employees, even the facility of VPF is available only for salaried individuals.

On the other hand, PPF is not linked to employment. The PPF account can be opened by self-employed as well as salaried individuals. That is one of the major difference between EPF, PPF, and VPF.

VPF vs PPF: Contributions

Let’s first see how the contributions in EPF work.

As soon as you start working in an organization, you start contributing 12% of your basic salary (plus dearness allowances) into your EPF account. The employer also matches your contribution and contributes 12% well. But out of the 12% Employer’s contribution, only 3.67% (out of 12%) goes to EPF account while the remaining 8.33% goes to your Employee’s Pension Scheme. You can use this EPF Corpus Calculator to estimate your EPF savings. Now, what is VPF contribution then? Many people want to invest more than just 12% of their salaries in EPF. This can be done via VPF. An employee can invest more than 12% of his basic salary in EPF and that is called the Voluntary Provident Fund. The investment limit for VPF is up to 100% of Basic Salary + Dearness Allowance.

PPF Account allows you to invest only up to Rs 1.5 lac in a financial year. Not more. And if you have multiple PPF accounts in the family, then ideally speaking, this limit of Rs 1.5 lac is on all the accounts combined if you are funding them. And you can now make any number of contributions ina year as long as the total doesn’t exceed Rs 1.5 lac (earlier and before 2020, a maximum of 12 contributions per year in a PPF account were allowed)

So in a way, both PPF and VPF are voluntary in nature. You are not forced to invest a fixed amount every month like in EPF. Though once you choose the monthly VPF contributions, it is not possible to change it mid-year.

VPF vs PPF: Returns (Interest Rate Comparison)

This is the big one. After all, you invest for returns. Right?

But both VPF and PPF being pure-debt products, can only be expected to deliver debt-type returns. As of the latest VPF interest rate and PPF interest rate, the returns are as follows:

  • VPF Interest Rate (for FY 2019-20): 8.50%
  • PPF Interest Rate (for FY 2020-21): 7.10%

So yes, as of now, VPF interest rates are higher than PPF interest rates. So you get the answer to VPF vs PPF interest rate 2020.

But what has been the past trend?

I have deep-dived earlier in historical PPF interest rates (since 1986) as well as historical VPF interest rates (since 1952-53).

But let’s just focus on the last 20 years to compare returns of PPF vs VPF:

  • 2020-21 VPF vs PPF Returns: VPF Rate 8.50% Vs PPF Rate 7.10%
  • 2019-20 VPF vs PPF Returns: VPF Rate 8.50% Vs PPF Rate 8.00% to 7.90%
  • 2018-19 VPF vs PPF Returns: VPF Rate 8.65% Vs PPF Rate 8.00% to 7.90%
  • 2017-18 VPF vs PPF Returns: VPF Rate 8.55% Vs PPF Rate 7.90% to 7.60%
  • 2016-17 VPF vs PPF Returns: VPF Rate 8.80% Vs PPF Rate 8.10% to 8.00%
  • 2015-16 VPF vs PPF Returns: VPF Rate 8.80% Vs PPF Rate 8.70%
  • 2014-15 VPF vs PPF Returns: VPF Rate 8.75% Vs PPF Rate 8.70%
  • 2013-14 VPF vs PPF Returns: VPF Rate 8.75% Vs PPF Rate 8.70%
  • 2012-13 VPF vs PPF Returns: VPF Rate 8.50% Vs PPF Rate 8.80%
  • 2011-12 VPF vs PPF Returns: VPF Rate 8.25% Vs PPF Rate 8.60%
  • 2010-11 VPF vs PPF Returns: VPF Rate 9.50% Vs PPF Rate 8.00%
  • 2009-10 VPF vs PPF Returns: VPF Rate 8.50% Vs PPF Rate 8.00%
  • 2008-09 VPF vs PPF Returns: VPF Rate 8.50% Vs PPF Rate 8.00%
  • 2007-08 VPF vs PPF Returns: VPF Rate 8.50% Vs PPF Rate 8.00%
  • 2006-07 VPF vs PPF Returns: VPF Rate 8.50% Vs PPF Rate 8.00%
  • 2005-06 VPF vs PPF Returns: VPF Rate 8.50% Vs PPF Rate 8.00%
  • 2004-05 VPF vs PPF Returns: VPF Rate 9.50% Vs PPF Rate 8.00%
  • 2003-04 VPF vs PPF Returns: VPF Rate 9.05% Vs PPF Rate 8.00%
  • 2002-03 VPF vs PPF Returns: VPF Rate 9.50% Vs PPF Rate 9.00%
  • 2001-02 VPF vs PPF Returns: VPF Rate 9.50% Vs PPF Rate 9.50%
  • 2000-01 VPF vs PPF Returns: VPF Rate 11.00% Vs PPF Rate 11.00%

As per the latest PF rules, the VPF/EPF rates are revised annually while PPF rates are revised quarterly.

And as per the comparative analysis of VPF rates Vs PPF rates done above, it is pretty clear that VPF/EPF rates have been higher mostly. And the difference between the two has somewhat increased in recent years. So if returns alone were the criteria, then VPF is a clear winner as VPF provides a better return than PPF.

But I have said this earlier many times that when investing, looking at returns alone is not the right way to compare and pick from various investment options. There are always a few other important factors to consider along with the returns.

Note – If you wish to understand more about interest calculation of provident fund accounts, then you can also read How interest on PPF Balance is calculated? And you can also read more about the impact of PPF rate cuts on your retirement savings. Or if you want to know how much savings can you accumulate in PPF, then go ahead give this PPF Calculator (Free Excel sheet) a spin. You will get a good understanding of how PPF savings grow over the years. 

VPF vs PPF: Tenure or Investment Duration

The regular tenure for Public Provident Fund or PPF is 15 years. After the completion of this duration, PPF account holders have 3 options: i) close the PPF account and take PPF maturity amount tax-free; ii) extend the account for 5 years with contributions, or iii) extend the account by 5 years without contributions. You can read in detail about PPF Options after 15-year maturity.

VPF (and EPF) accounts are generally considered to have tenure till you retire (or resign and not take up the job again). That is you will have an account up to retirement or resignation, whichever is earlier. In the case of a job switch, the EPF account can be transferred from the old employer to a new one using UAN (Universal Account Number).

So by and large, it can be said that VPF (which is linked to EPF) has a much longer tenure than PPF.

VPF vs PPF: Tax Benefits

Both PPF and VPF contributions are eligible for Section 80C tax exemption up to Rs 1.5 lac per financial year. That was about tax benefits at the time of making contributions in PPF or VPF accounts.

What about taxation of interest earned? And what about taxation on maturity?

Both VPF and PPF come under the EEE (Exempt-Exempt-Exempt) tax regime. That is, you get tax exemptions and benefits at three levels:

  • 1st E – investments in EPF up to Rs 1.5 lac per year eligible for deduction.
  • 2nd E – Interest earned on EPF is tax exempted.
  • 3rd E – EPF Maturity amount is exempt from tax.

These are some of the major differences between PPF and VPF account.

But as you must have realized, it would still be difficult to choose between VPF and PPF unless we know the financial requirements and unique circumstances of the account holder or investor.

How to start investing in VPF & open a VPF account?

If you want to begin making additional contributions to your EPF account via VPF or Voluntary Provident Fund, then you just need to contact your employer’s finance department to deduct a fixed percentage from your basic salary as VPF every month.

How to start investing in PPF & open a PPF account?

You can open a PPF account in any of the nationalized bank branches, post offices or even online through designated bank’s websites.

Choosing between VPF Vs PPF

This is a tough decision to make as we can’t just look at the returns comparison which clearly shows that VPF gives more returns than PPF.

We cannot ignore the withdrawal restrictions that come with VPF (and EPF). As you know, full proper tax-free withdrawal is possible in VPF EPF only at the time of retirement (read more about the latest EPF Interest Rates, Taxation & Withdrawal Rules). This is not a bad thing but if you are looking to use VPF to save for more short term or medium-term goals before retirement, then it is not suitable for that in spite of giving higher returns.

PPF too has a long tenure of 15 years. But after that, the entire PPF corpus is available tax-free. Even if you extend the PPF account in blocks of 5 years (as is allowed by the latest PPF Maturity Rules for Extension after 15 years) the withdrawal restrictions are more lenient when compared to PPF withdrawal rules before 15 years.

So ideally, both VPF and PPF are better suited for retirement savings. If you are a salaried employee, then VPF is a great retirement planning tool that can be there in the debt portfolio of your retirement savings (alongwith EPF).

Another thing to note is the amount you are allowed to invest in both. PPF has a clear limit of Rs 1.5 lac per year. On the other hand, VPF for most people offers a higher limit with its rule of 100% of Basic Salary + Dearness Allowance. But many companies these days offer a salary structure where Basic Salary is very low and other (non-DA) allowances are high. So if that’s the case, then you can’t invest much by means of VPF. So then you would need to use VPF and PPF both.

Since we are talking about saving for retirement here, I think it’s imperative to bring in the National Pension System of NPS too in the discussion. NPS is a retirement savings product that is designed specifically to ensure that savers have a pension in retirement years. Though it is a tool for retirement pension and saving, what attracts people most is the Extra Rs 50,000 Tax Benefit for NPS subscribers exclusively.

Note – Use this NPS Calculator for NPS Corpus & Pension and also read the major differences between NPS Tier 1 and Tier 2 Account to know why NPS Tier 1 account is the one to be used for actual retirement planning).

If you are an investor who invests via EPF and a small amount in VPF (due to Basic Pay linked investment limit of VPF), then you can also look at NPS.

NPS allows its subscribers to control where the money gets invested, i.e. choose their asset allocation (if NPS Active Choice is selected from various NPS Investment Options). So for the conservative investor, choosing NPS (Conservative Allocation) to invest and save more money for retirement can also work well. Ofcourse, there are withdrawal restrictions and mandatory annuity purchase for NPS (read more about the latest NPS Exit & Withdrawal Rules to understand this important aspect about NPS). But that is not a bad thing if you are saving for retirement.

So for many, investing in both EPF (VPF) and NPS might be a good strategy.

Note – Like VPF vs PPF debate, there are many people who are confused between NPS and PPF too. So if it interests you, then consider reading this detailed note on NPS Vs PPF.

But in our ongoing discussion of the difference between VPF and PPF and how to choose between VPF Vs. PPF, let me bring back the idea of proper allocation for retirement planning on the table.

You will agree with me that equity has proven potential for wealth creation in the long term. As is also given support by the many SIP success stories in India. And since we are saving for retirement, it can be said that for most people, retirement is also a financial goal with long term investment horizon.

So to for accumulating a retirement corpus that is capable of handling inflation and take care of all your expenses in retirement, it is advisable to have a good amount of equity exposure in your retirement savings.

How to introduce equity in your retirement plan?

Via regular SIP in good Equity Mutual Funds which are carefully chosen to create a well-diversified proper mutual fund portfolio.

EPF or VPF or PPF is a fantastic investment as long as you stay within the necessary asset allocation. You should not try to have 100% debt portfolio for your retirement. Here is what you can do and think about:

  • Find out what is the best-suited asset allocation strategy for your retirement planning. It will depend on your age, expected or desired age of retirement, risk appetite, etc. among other things. A good retirement planner can help you answer such questions and also help you make a proper financial plan for your retirement.
  • Suppose we arrive at an Equity:Debt 60:40 kind of allocation.
  • If you are investing in EPF, then check if VPF contributions can be made. If EPF+VPF can reach up to 40% of your regular retirement contributions, then it’s good you don’t need anything else.
  • If it doesn’t, then you can consider NPS (Conservative Allocation) or good debt funds to bridge the gap.
  • The equity allocation can be handled via direct stocks or good equity funds. But from experience, I can tell that for most people looking to take on equity exposure, their Best Bet is SIP in good Equity Funds.
  • If you are a conservative investor and don’t want to invest in equities but understand the need for it, then you can do EPF + VPF for debt and take exposure to equity via NPS (Aggressive Equity Scheme investment Option).
  • There can be several other combinations. Different people are suited to different types of retirement savings products.

Note – To know more about various investment options available for NPS subscribers, read this detailed note on NPS Active vs Auto Choice.

So what I am trying to highlight is that it is good to do an analysis of PPF Vs VPF and think about EPF or VPF or PPF or NPS, but at the end of the day, you should not ignore that choosing a proper asset allocation for retirement is much more important. Once that is decided, only then you will be able to pick the right product for it.

So if you are young, then maybe a simple strategy of EPF and Equity Funds is sufficient for you. And even within equity fund categories, one can consider ELSS (Equity Linked Savings Schemes). But remember, ELSS cannot be an alternative or supplement to PPF or VPF or EPF (debt product). Though we compare ELSS Vs PPF it should be done with a clear thought in mind that both are different assets. If it has to be taken, then the decision on whether to opt for PPF or ELSS must eventually be taken after viewing the entire asset allocation. If the portfolio is heavily tilted towards equity, then PPF (or VPF) can be considered. On the other hand, if the savings are in a debt-heavy portfolio, then ELSS may be a better choice.

If you are middle-aged and already have over-exposure to debt instruments, then again you can consider equity funds or NPS (Aggressive option). But if you don’t have enough debt savings and are a not-so-aggressive risk-averse conservative investor, then you may go for increasing your VPF contributions. If it is not sufficient, then you can also add PPF to it. And if you further want to add to it without any caps in investment limit every financial year, then NPS too can be introduced in the retirement savings portfolio.

All investors will have to take a call depending on what is best from their asset allocation perspective.

And let me tell you something. Just focusing on VPF vs PPF talks isn’t enough. It’s possible that your provident fund dominated savings (EPF VPF PPF) may really not be enough for retirement.

And I am sure you don’t want to run out of money when you are old. Right?

It is for this reason that proper planning for retirement is a must. You only get one shot retirement and there are no loans for retirement either. So you cannot make a mistake with your retirement savings. Retirement is indeed a nasty problem! if you know what I mean.

Now ask yourself these questions before moving ahead and try to answer them honestly:

  • Are you saving enough towards your retirement?
  • Is my EPF saving enough for retirement?
  • Should I increase my VPF contribution or invest in PPF?
  • Is VPF better than PPF?
  • VPF Vs PPF which is better for tax saving investing?
  • EPF vs PPF vs VPF: Which is better for saving?
  • How much do I need to save for retirement?
  • How much to invest monthly for retirement?

If you find it tough to answer these questions about retirement, then maybe it’s a good time to consider having another set of eyes look at your retirement plan. And it’s better to take professional help to plan your retirement savings properly:

Stable Investor Retirement Planning Service

 

I may sound repetitive but it’s important and hence, I say it again.

You get just one shot at retirement. You have to get it right. The debate on VPF Vs. PPF and PPF or VPF are secondary in front of the issue of getting your retirement planning right as early as possible.

Understanding the differences between VPF and PPF is the key to deciding which is better in VPF Vs. PPF. And that completes our detailed discussion about choosing between VPF or PPF in India (Updated 2020). As for the latest difference in interest rates, the EPF interest rate is 8.50% (Financial year 2019-20) and PPF interest rate is 7.1% (Financial year 2020-21). Both VPF and PPF can serve your retirement planning needs well. But it’s important to understand VPF or PPF which is better and more suitable for investor’s unique requirements and financial goals.

So think about your retirement and how best to pick between PPF and VPF. Take your time and then make an informed decision about planning your retirement using VPF or PPF in 2020 as part of your retirement portfolio savings strategy.

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