Tax Planning Section 80C

 

Mandatory EPF, Voluntary PPF and the lesser know VPF

 

Though all salaried class are well aware of PF or EPF which is mandatorily deducted from their salaries but not many are aware of VPF. Here I list down few points to do a quick comparison between PPF and VPF and why one must put some money in VPF instead of PPF.

PPF

Interest - PPF rates are now market linked, ppf rate will be 0.25% above market rate of 10 year Govt securities. Currently its 8.8% though next year its expected to be lower around 8.5% pa. Interest is compounded annually though its calculated on monthly basis. Hold on to PPF till maturity to maximize compounding effect.
Frequency - Can submit 12 times a year

Always submit premium before 5th of a month to earn interest for that month as interest is applicable on minimum balance in account b/w 5^th and 30^th of that month.
Tax benefit - No tax on interest earned, withdrawls or maturiy Best part of PPF is one can also take a loan against it, but loan cannot exceed 25% of the balance in the preceding year. Interest charged on loan is 2% till 3 years and 6% for longer tenures.

From current fiscal onwards i.e. 2012-2013, one can open PPF account even with ICICI as well as IDBI.

VPF

Voluntary Provident Fund (VPF): One can contribute more than PF ceiling of 12% mandated by Govt. VPF enjoys same benefits as PF except that employer is not liable to contribute towards VPF unlike EPF.
Maximum contribution: VPF + EPF must be less than 100% of basic salary
Interest - Interest rate of VPF is same as EPF and withdrawl is tax free. Interest rate for VPF/EPF is higher than PPF (as of Jan 2013)
Investment Period
VPF - Amout paid at time of leaving the job. Can be transferred from one company to another
PPF - Amount can be withdrawn at maturity i.e. after 15 years
Tax implication:
VPF like PPF eligible under 80 C for Tax benefit. No tax on withdrawal

Additionally one can break investment into VPF across months, so one need not invest same amount every month instead one can invest in single shot or once every month or only for a few months.
VPF savings are deposited as part of PF in PF account itself


If you are salaried and have to decide between the two, Voluntary provident fund is better than PPF due to a) Higher Interest rate (compare rates in financial year in which you need to take decision) b) quick process c) Locking period is less