PPF vs VPF: What are the similarities between these schemes? Which can be a better investment option?

PPF vs VPF: Both savings schemes in India that offer benefits for retirement planning have some similarities: they provide tax benefits, are long-term investments, offer good interest rates, are safe, and allow partial withdrawals.

Tax Benefits: Contributions made to both PPF and VPF accounts qualify for tax deduction under Section 80C of the Income Tax Act, 1961. This helps reduce your taxable income and save taxes.

Long-Term Investment: Both schemes are meant for long-term savings. PPF has a maturity period of 15 years, with the option to extend it further in blocks of 5 years. VPF continues until your retirement.

Earn Interest: Both PPF and VPF accounts earn interest on the deposited amount. The interest rate is reviewed by the government periodically.

Safe and Secure: Since they are government-backed schemes, both PPF and VPF are considered safe investment options.

Partial Withdrawals: Both schemes allow for partial withdrawals after a certain lock-in period. However, there are regulations around when and how much can be withdrawn.

PPF vs VPF: Taxation

PPF: This scheme is allowed as a deduction under Section 80C, subject to a threshold of Rs 1.50 lakh. The interest rate and the maturity amount are also tax-exempt under 10(11) of the IT Act.

VPF: The tax implications of this scheme are as follows:

VPF contributions would be allowed as a deduction under Section 80C, subject to the threshold of Rs. 1.50 lakh. Further, any interest earned on VPF would be exempt from tax.

However, any interest, to the extent it relates to the amount of PF contribution exceeding Rs. 2,50,000/- made by employees, would be taxable.

The VPF maturity amount would be exempt from tax if the withdrawal was made after 5 years. In the case of a partial or full withdrawal before 5 years, the same would be subject to tax.

PPF vs VPF: Which one is good for you?

These two schemes, PPF and VPF, come with different benefits, including interest rates, security features, and tax, but which one should you choose:

According to Dr. Suresh Surana, Founder, RSM India, if an investor is seeking flexibility in investment amounts and prefers tax-free withdrawals, PPF may be a more suitable option. Whereas, in the case of a salaried employee associated with an organisation covered under EPF and wanting to enhance their retirement savings with consistent contributions, VPF could be a good choice.

"The investment choice between PPF and VPS should be made taking into consideration the investment horizon, risk tolerance, overall financial plan, etc.," he added.