After demonetization, banks cut down interest offered on FDs and Savings Bank accounts. The Government cut down interest offered on small saving schemes like PPF, NSC, SCSS and post office saving schemes. These were tough times for conservative investors as interest rates on FDs and small saving schemes were in a race to the bottom.
Many conservative investors put money in mutual funds hoping to get better returns. To educate these new investors, AMFI launched the highly successful Mutual Funds Sahi Hai campaign. Crores of rupees poured into mutual funds via SIPs.
Inflation has shot up in recent times and RBI has gone for back to back repo hikes in its bi-monthly policy review. The repo rate was hiked twice and now stands at 6.5%. This is good news for conservative investors and senior citizens. Banks had started hiking FD rates, as loan rates go up. The Government will soon hike rates on small saving schemes. As interest rates rise you have a dilemma. Should you invest in PPF or VPF?
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You can invest in PPF with a minimum of Rs 500 a year and a maximum of Rs 1.5 Lakhs a year. PPF enjoys the EEE benefit. The money invested enjoys a tax benefit up to Rs 1.5 Lakh a year under Section 80C. Interest earned and money withdrawn at maturity are tax free.
Yes, but salaried citizens also have another option. They can invest in the Voluntary Provident Fund popularly called VPF. When you start working, both you and employer contribute 12% of your basic salary + dearness allowance, into the Employee Provident Fund (EPF). You have an option to make a contribution beyond the mandatory 12% (employee contribution) to the EPF, in the VPF. The maximum contribution is capped at 100% of basic salary + dearness allowance. Employers have no obligation to contribute to your VPF. You have no obligation to continue contributions to the VPF.
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The money invested in the EPF earns interest of 8.55% a year. The money invested in the VPF earns the same interest of 8.55%. This is nearly a whole 1% more than the PPF. So, salaried citizens must definitely target an investment in the VPF.
When it comes to tax benefits, PPF, EPF and VPF enjoy the EEE benefit. So, VPF enjoys the same tax benefits that PPF enjoys. Your investment in the VPF is very safe as it is backed by the Central Government.
VPF offers a higher rate: The interest rates on PPF are revised each quarter, while the interest rates on EPF and VPF are revised each year. If you take a look at EPF/VPF vs PPF, you will find interest rates on EPF/VPF have always been higher than PPF.
Take a look at the year 2017-18. The EPF/VPF interest rates were 8.55% for this year and PPF was between 7.6-7.9%, while for the year 2016-17, the EPF/VPF interest rates were 8.65% and PPF was between 8-8.1%.
Investing in VPF is easy: To invest in PPF, you might have to walk into a bank or a post office. To invest in VPF, all you have to do is instruct your office accounts department and there’s nothing else, unless you change the job. A fixed amount (as decided by you) is deducted from your salary each month and invested in the VPF. The VPF account can be transferred on a job change as UAN for the EPFO remains same.
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