VPF vs PPF: Which is better

If you look at the interest rate offered, tenure of investment and tax implications voluntary provident fund scores over public provident fund.

Many of us have this question and want to know which is better as an investment option: VPF (Voluntary Provident Fund) or Public Provident Fund. As the name suggests both the products -- VPF and PPF are provident fund schemes.

Let's understand the two schemes in detail:

What is Voluntary Provident Fund (VPF)

Voluntary Provident Fund is voluntary contributions to the Employee Provident Fund account by the employee. It is directly linked to your EPF account. The only basic difference in VPF and EPF is, in the former employee does it voluntarily whereas in EPF contribution is mandatory.

Note: Only salaried employees have the option of Voluntary Provident Fund.

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What is Public Provident Fund

Public Provident Fund (PPF) is a statutory scheme by the Central Government of India. It is one of the instruments suitable for long term investment.

PPF scheme is for a period of 15 years. The minimum investment required in a PPF account is Rs 500 per year and the maximum investment amount is Rs 70,000 per year. You can take a loan on the PPF account after completion of the third year opening of the account. Partial withdrawal is also applicable after completion of 4 years after account opening.

VPF vs PPF: Interest rate

Interest rate on Voluntary Provident Fund (VPF) is a little more than EPF interest rate.

VPF: 8.5% per annum (For the year 2010 2011 you can expect a return of 9.5% per annum)

PPF: 8% per annum

VPF vs PPF: Investment period

VPF: Amount is paid at the time of retirement or resignation. Or, it can be transferred from one company to the other if one changes jobs. On death, the accumulated balance is paid to the legal heir.

PPF: Amount can be withdrawn on maturity, that is, after 15 years of the close of the financial year

VPF vs PPF: Impact of tax

VPF: Investment qualifies under Section 80C under the Rs 1,00,000 limit.

PPF: Investment qualifies under Section 80C under the Rs 1,00,000 limit. On maturity, you pay absolutely no tax.

VPF or PPF: Which is better?

To sum up, major difference between VPF and PPF is the rate of return. Rate of interest on VPF is also higher (currently 8.5%) than interest on PPF (8%).

If you are salaried and have to decide between the two, VPF is better than PPF.