PF vs VPF Explained: PPF vs VPF Returns, Tax, Liquidity & Which Is Better

When it comes to tax-saving options, Indian citizen has quite a few schemes to invest their money, reduce taxable income, and eventually save tax. Of all the available options, only a few fall in the EEE scheme. These options not only save tax upfront but in other stages. In this article, we look at the two popular tax-saving investments - PPF and VPF and figure out which is the better option for you.

Tax Saving - EEE schemes Explained

EEE (Exempt-Exempt-Exempt) schemes are investment instruments that offer tax benefits at multiple levels, as mentioned above. These schemes provide tax advantages at the time of investment, during the investment period, and upon withdrawal. Let us understand what these three E means in detail:

• Tax Deduction: You can claim a tax deduction under Section 80C of the Income Tax Act for investments made in EEE schemes. It reduces taxable income and lowers your overall tax liability.
• Tax-Free Growth: The returns generated from EEE schemes are tax-free, allowing your investments to grow without being eroded by taxes.
• Tax-Free Withdrawals: Upon maturity or redemption, the proceeds from EEE schemes are typically tax-free, providing a lump sum tax-free income.

How PPF and VPF Help in Saving Tax?

Let us understand these two options and see how they are helpful for tax saving.

The Public Provident Fund (PPF) is a long-term savings scheme launched by the Government of India. It is one of the most popular tax-saving instruments among individuals due to its guaranteed returns and risk-free nature.

Voluntary Provident Fund (VPF) is an extension of the Employee Provident Fund (EPF) scheme. As a salaried individual, a portion of your salary (12%) is mandatorily contributed to your EPF account. However, if you wish to increase your contribution beyond this mandatory amount, you can choose to contribute voluntarily, which is known as VPF.

Both of these options fall under EEE schemes. Hence, they help you save taxes. There are no tax deduction in growth phase and on redemption. Let us understand with an example. If you invest Rs 1.5 lakh in PPF or VPF during a financial year, you can reduce your taxable income by Rs 1.5 lakh.

Assuming a tax rate of 30%, this translates to a tax saving of Rs 45,000. Additionally, the interest earned on your investment will be tax-free, further enhancing your overall returns. In other words, you don't have to pay capital gain taxes.

Key Differences between PPF and VPF

You can better understand these two options by looking at the differences:

PPF vs VPF : Which is better for Tax Saving?

Now comes the important question - which is better? Or which one should you pick? There is no universal answer to the question, so we will talk about different scenarios, and based on your situation, you should be able to pick one or both.

If you prefer stability and guaranteed returns over a long period, PPF is a great option. The lock-in period, though long, encourages disciplined saving and can act as a reliable fund for retirement or other long-term financial goals. Additionally, since the returns are tax-free, it offers excellent post-tax returns for conservative investors.

Salaried individuals seeking higher contributions, looking for a higher rate of return than PPF, and willing to contribute a significant portion of their salary towards retirement savings, can consider VPF. The higher interest rate and tax benefits make it an attractive option for those in high-income brackets who want to secure substantial savings for retirement.

Conclusion

Both PPF and VPF have their merits, and the right choice depends on your income, employment status, risk appetite, and long-term financial goals. Many individuals opt for a combination of both to diversify their tax-saving portfolio while ensuring that they meet their future financial objectives.

Additional Read: ELSS vs PPF: Key Differences Between ELSS and PPF