We are nearing the deadline to Submit documents to claim Tax Deductions for the Financial Year 2020-2021. Easy way to claim save taxes is to invest money into different provident funds available in India as it can be done in single click.

In this post, let’s discuss in detail about the different types of Provident Funds (PF) available in India.

What are the 3 types of Provident Funds?

1. Employee Provident Fund (EPF)
2. Voluntary Provident Fund (VPF)
3. Public Provident Fund (PPF)

What is Employee Provident Fund (EPF)?

• Most of you know about this already as almost all the employers use it. Both Employer and Employee should contribute 12% of Basic Salary into EPF (Govt employees have been moved into NPS, I’m not considering that aspect here).
• At 8.5% interest (subject to revision), this is producing highest return among all the debt instruments with Sovereign guarantee – which means it provides 100% safety. You can check your EPFO Account/Passbook to ensure amount is credited properly every month & interest is credited every year. You can use UAN Account number to verify the details.
• Interest Earned is 100% Tax Free as well.
• Returns Generated is re-invested automatically, so over the years effect of Compounding is significant.
• Withdrawal is at Retirement but intermediate withdrawal is possible in specific cases (Building a house, Marriage, etc).
• Also as per the new rules, 75% of corpus can be withdrawn if you remain unemployed for a month and remaining 25% can be withdrawn if you remain unemployed for 2 months.
• All the contributions towards EPF is eligible for Tax Deduction under 80C with limit of 1.5L.
• This is the best Debt (Fixed income generating) investment available in India at the moment.

What is Voluntary Provident Fund (VPF)?

• All the rules mentioned (regarding taxation, interest/returns, withdrawal, compounding) for EPF is applicable for VPF as well. There is only 1 difference which is on the contribution.
• Contributing towards VPF is completely voluntary and you are allowed to decide the amount or % of contribution. Maximum contribution allowed is 100% of Basic Pay + DA as per your salary structure (remember 12% of basic is already going for EPF, so at the max you can mark VPF as 88%).
• Account number used for VPF is also same as EPF, so contribution is very simple – no need for any documentation or account opening. You just have to inform your Payroll Team on the amount or % you want to invest every month. If your company provides a portal for salary structure, you can do it yourself as well. Most of the employers allows you to change this every month as well.
• If you are risk averse but long term investor, this is the best way to utilize 80C component every year.

What is Public Provident Fund (PPF)?

• It is another Fixed income generating instrument started with the objective of giving financial security to employees from unorganized sector. But it is open for subscription for everyone – salaried, self- employed, business(wo)man. Even Rakesh Jhunjhunwala is using it.
• It has Sovereign guarantee – which means it provides 100% safety.
• You can contribute Maximum of 1.5L every year. You can do it in 1 shot or maximum of 12 installments.
• Currently PPF generates 7.1% interest.
• The interest received on the subscription is compounded. You earn interest on the interest earned.
• All the amount (investment and returns generated) is exempt from tax.
• Withdrawal is possible after 15 years, 50% withdrawal is allowed after 6 years.
• If you don’t want to withdraw at the end of 15 years, you can extend it in the block of 5 years. Most people opt for this.
• Few people open PPF account and contribute just 500 Rupees (minimum) for first 10 years and from 11th year they contribute 1.5L each year and use it like a 5 year FD.

So, which is your favorite instrument for generating fixed income? Is it EPF, VPF or PPF? Are you contributing towards VPF, which is a great product by itself. If not why?

Feel free to ask any questions, I’ll be happy to help.