Is VPF different from EPF? Is it a better investment than FD?

Voluntary Provident Fund (VPF) is nothing but an extension of the Employee Provident Fund (EPF) wherein a salaried employee can contribute more than 12 per cent of the basic salary. As far as treating VPF as the primary investment is concerned, a salaried person is entitled to contribute up to 100 per cent of his basic, alongside the dearness allowance.   

Raj Khosla, Founder and MD of MyMoneyMantra.com, says, “With the present rate of return exceeding 8 per cent per annum, VPF continues to enjoy a superlative return as compared to the conventional fixed deposits with banks and post offices. A mandatory lock-in of five years can be a deal-breaker for some, but VPF can meaningfully uplift returns in the long-term, effectively paving the way for a chunkier corpus.”  

A higher rate of return simply translates into higher interest earnings. VPF is classified in the exempt-exempt-exempt (EEE) category further makes the deal attractive for salaried individuals as one can claim a tax break of up to Rs 1.5 lakh under section 80C of the income tax act at the time of investment in a fiscal year. Furthermore, the principal and interest amount at the maturity are also exempt from income taxes.  

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On the contrary, only a tax-saver FD can help you avail of the income tax benefit under Section 80C, while the interest earned beyond Rs 10,000 is taxable at maturity. Standard FDs don’t even provide a tax break under Section 80C.  

VPF vs FD  

“On the completion of the 5th year, the proceeds from VPF investment of Rs 5 lakh fetch a return of Rs 2.39 lakh. This is 14 per cent or Rs 30,273 higher as compared to a cumulative return of Rs 2.09 lakh from FD. Though a person can avail of a maximum tax break of up to Rs 1.5 lakh, the proceeds at the time of maturity remain tax-free, unlike in the case of FDs, where interest amount exceeding Rs 10,000 will be taxable according to the prevailing tax slabs,” said Khosla.  

You can seamlessly increase or decrease the contributions at any time of the year in a VPF account. However, FDs could be advantageous for people who can’t ensure a periodic outgo each month and are considering investing for a shorter tenure, as premature withdrawal from a VPF account before mandatory lock-in attracts a penalty.