BT Insight: Looking for PPF-like benefits but higher returns? Here's what you can do

Public provident fund is a popular long-term debt investment option that offers guaranteed returns at relatively higher interest rate along with section 80-C income tax benefit and tax-exempt interest and maturity proceeds. However, if you are a salaried employee, there is another equally attractive investment option offering higher interest that most people tend to overlook.

Voluntary Provident Fund, also called Voluntary Retirement Fund, is an extension of Employee Provident Fund, and offers similar benefits as PPF along with an added advantage of typically a higher interest rate than the PPF. The interest rate on VPF and EPF is 8.5 per cent at present, while the government has reduced the PPF rate to 7.1 per cent for the June quarter compared to 7.9 per cent for the March quarter.

"VPF outscores PPF in terms of both liquidity and returns. The interest rate applicable for VPF is same as the EPF, which has usually been higher than the rates offered by PPF. The interest rate for EPF for FY20 has been fixed at 8.5 per cent whereas PPF earned interest rate of 8 per cent in the first quarter of FY20 and 7.9 per cent in the rest of the quarters of FY20,"says Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

We tell you all about VPF and why you should not ignore it:

If your employer is covered under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, it contributes up to 12 per cent of your basic salary plus dearness allowance (DA) every month into your EPF account. You also contribute the equal amount towards your EPF. However, there is a provision for voluntary contribution over and above the statutory 12 per cent of your basic pay and DA. You can pay up to 100 per cent of your basic salary plus DA towards voluntary provident fund including your EPF contribution each financial year. Although VPF is maintained separately, it enjoys similar benefits as EPF, that is, tax deduction under section 80-C of I-T Act, tax-free interest earned during the investment period and tax-exempt maturity amount.

Premature withdrawal

Although the tenure of the VPF account will remain the same as the EPF, that is, until one resigns or retires from his employment, if one withdraws from his VPF account before the completion of five years, then the withdrawn amount will be taxable as per her tax slab. However, you can avail non-refundable advances against your EPF and VPF balances for select purposes, such as buying a house, repaying a home loan, medical needs, education or marriage of children. "The advance amount will depend on the employee's reason for availing such advances, the number of years of service, etc," says Kukreja. In case you leave your service and remain unemployed for two months you can withdraw 100 per cent of your EPF balance and this will also include your VPF balance.

How to open a VPF account

Opening a VPF account is hassle free. You only have to approach your HR to fill a VPF registration form, and your account will be activated. Since the amount is deducted directly from your salary, unlike PPF, you don't have to remember making an investment each year. You can anytime request your employer in writing to increase or decrease your contribution towards VPF from your salary. Besides, you won't have to do any paper work to avail tax benefits on VPF. It will automatically be calculated in the Form-16 given by the employer.

Who should invest in VPF

If you are a salaried individual in your twenties or thirties, your retirement is far away. You can generate bigger retirement corpus if you invest in equities. Historically, equities have always returned higher by a wide margin compared to other fixed income asset classes such as PPF, EPF and VPF. However, as part of debt investment in your investment portfolio if you are looking for a risk-free long-term retirement option, you may consider VPF and PPF and between the two, the former. VPF is indeed a better choice for people closer to retirement to enhance their debt portfolio.

"Although VPF has been designed for providing post-retirement financial security to the salaried class, equity mutual fund investments are considered as the best retirement solution for the retail investors, especially for those years away from their retirement age. Those approaching their retirement age, say up to five years away, can consider VPF contribution as part of their asset allocation strategy. VPF investments by such investors will reduce the market risk of their retirement portfolio while earning higher post-tax returns than bank fixed deposits, PPF and other small savings schemes," says Kukreja.

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