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Should you invest in PPF or increase contribution via VPF?

According to reports, the Central Board of Trustees of Employees' Provident Fund Organization (EPFO) has recommended 8.5% interest for the previous financial year. The government has not yet officially notified it. (istock)Premium
According to reports, the Central Board of Trustees of Employees' Provident Fund Organization (EPFO) has recommended 8.5% interest for the previous financial year. The government has not yet officially notified it. (istock)

  • Salaried people can increase their contribution to EPF by opting for VPF
  • While the interest rate on PPF is lower than EPF at present, the former involves lesser administrative work

NEW DELHI : If you are looking at government-backed retirement schemes, you have four options. Employees' provident fund (EPF) and voluntary provident fund (VPF) are available to the salaried class. National Pension Scheme (NPS) and Public Provident Fund (PPF) are open to all.

Of the three schemes, NPS is market-linked—the returns are based on the performance of the underlying investments. The other three schemes carry a fixed interest rate.

Typically, employees use a combination of EPF and PPF. But instead of investing in PPF, salaried people can increase their contribution to EPF (by opting for VPF). In the recent past, EPF has offered higher interest returns than PPF.

Let us take a look at the difference between PPF and EPF that can help you decide whether you should opt for PPF or increase the EPF contribution.

You can contribute to PPF by opening an account with a bank. The interest rate offered on PPF could change every quarter. At present, it is 7.1%. The minimum contribution for PPF is 500, and the maximum is 1.5 lakh a year.

In EPF, the employee can contribute 10% or 12% of the basic salary, and the employer matches it. If your basic salary is, say, 30,000, you and your employer can contribute up to 3,600 each month (total of 7,200).

While the employer contribution is restricted at 12% maximum, an employee can increase his or her contribution through VPF.

The interest rate on EPF is declared after the completion of the financial year. For example, for the contributions made in the financial year 2020-21, the rate will be declared in the current financial year.

According to reports, the Central Board of Trustees of Employees' Provident Fund Organization (EPFO) has recommended 8.5% interest for the previous financial year. The government has not yet officially notified it.

In both schemes, individuals get a tax deduction when they invest; there is no tax during the accumulation phase and on maturity.

While the interest rate on PPF is lower than EPF at present, the former involves lesser administrative work. In EPF, you must transfer the balance from the previous employer to the new one once you leave the job.

If you withdraw the money because you have left the job, you may need to pay tax if you have not completed five years with your employer.

If you are confused about whether to increase the EPF contribution and PPF, do take a call based on the interest rates and administrative work involved in the two.

Do you have personal finance queries? Send them to mintmoney@livemint.com and get them answered by industry experts.

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