While Public Provident Fund (PPF) and 5-year Tax Saver Fixed Deposit schemes are very popular among salaried individuals for claiming tax deductions under Section 80C of the Income Tax Act, there is a third option that is better than these two. Known as VPF (Voluntary Provident Fund), the scheme offers better interest rates than PPF and FD.
Is VPF similar to EPF?
Salaried employees are entitled to mandatory Employees Provident Fund (EPF) benefits. However, VPF is different from EPF. VPF, as the name suggests, is a voluntary contribution facility available to salaried employees.
VPF vs PPF
The current rate of interest under PPF is 7.1% with a 15-year mandatory lock-in. In VPN, the lock-in period is just 5 years and the current interest rate is 8.1%.
Interest earned from PPF deposits is tax-free, while in the case of VPF, interest on combined deposits (VPF+EPF) up to Rs 2.5 lakh is tax-free.
Emergency withdrawal from VPF is allowed at any time. However, in the case of PPF, you can make an emergency withdrawal only after 5 years.
VPF vs Tax-saver FD
The interest rate offered on tax-saver FDs by most banks is around 6% with a mandatory lock-in of 5 years. VPF is offering a much higher interest rate. VPF interest is also higher than schemes like National Savings Certificate (NSC).
The interest earned from tax-saver FD is taxable as per the tax slab of the investors. No emergency withdrawal is allowed from tax-saver FD.
What you should keep in mind?
While VPF appears a much better tax-saving investment instrument than PPF or 5-year FD, you should keep in mind that interest earned above combined contribution from EPF + VPF above Rs 2.5 lakh is taxable. So, you can prefer VPF over PPF and FD if your annual contribution would be less than Rs 2.5 lakh. You can contribute to VPF by writing to the HR representative in your company.