Why I Started Investing In VPF And Stopped Investing In PPF

Here is my second article on personal finance. In today’s post lets explore various savings options aimed toward retirement fund – PF, PPF & VPF and why we should contribute towards VPF.

If you are an employee you should be having a PF account (check your PF status here). PF or Provident Fund is a good debt savings option that is aimed at providing bulk returns at the time of retirement. By the law, every salaried employee should have a PF account* and he is forced to save 8 – 12% of his basic salary to PF account and employers also should contribute equal amount towards this savings. PF is a very good long term debt investment that gives guaranteed returns. The rate of returns for PF account were 8.5% last year and this year it’s increased to 9.5%.

PPF, public provident fund, is similar to PF but this savings account but it can be opened by anyone(PF accounts are available only to salaried employees) in a nearest post office or nationalized banks like SBI. But the PPF returns are always lower than PF returns and they are yielding 8% of returns for the past few years and it’s expected to be the same next few years.

The third type of savings option that is similar PF & PPF is VPF or Voluntary Provident Fund. This savings option is available only to salaried employees that gives guaranteed returns equal to PF.

If you are a salaried employee, PF is a mandatory savings and you don’t have a say. You should invest in it. Apart from PF, if you want to save more money then you can choose to save in PPF or VPF. But which one you should opt for- PPF or VPF? And why?

PPF Account Returns Are @8% But VPF Returns are @ 9.5%

Till last year I use to invest in PPF to get 8% of guaranteed returns as well as tax benifits under 80CC. But this year after learning about VPF, i stopped investing in PPF and started investing in VPF as it gives me 9.5% of guaranteed returns as well as tax benefits under 80CC.

You see, there is an 1.5% of extra interest I earn in VPF when compared to PPF. This 1.5% interest makes lots of difference in the long run with compounding factor.

Generally employers expect us to declare VPF contributions at the beginning of the financial year. Today I spoke to finance team of my employer and made a declaration to contribute towards VPF.  Quite happy to know the better savings options and get more returns on hard earned money.

Few Things You Should Be Aware of VPF

• In case of PF, you and your employer contribute equal amounts towards the savings. But in VPF, your employer does not contribute any amount. It’s all up to you to invest in VPF.
• VPF savings are deposited as part of your PF account – all your contribution towards VPF is maintained in your PF account. No separate account is created for your VPF savings.
• When you transfer/withdraw PF, you will automatically transfer/withdraw VPF amount too – as VPF is part of your PF account, it can be transferred or withdrawn along with PF amount.
• VPF savings option is available only for salaried employees. If you are not a salaried employee, you can’t contribute towards VPF. PPF is the way to go for you.
• Your contribution towards PF + VPF should be less than or equal to your basic salary. Lets say if you are contributing 12% of your basic towards PF, the maximum amount you can save towards VPF is 88% of your basic salary.

I advice you all to explore VPF savings option and start reaping it’s benefits.

cc image credit: flickr/neovain