VPF and PPF are the most preferred financial instruments for their flexibility, secure nature, and value addition.
You never know what the future beholds, so it makes sense to secure for the uncertain and the unforeseen. Most people postpone their savings plans for retirement believing that a few pennies saved today will do no good to create the desired retirement corpus. Little do many realise that savings, if done religiously for prolonged periods, can not only secure your financial well-being in the present but pay for your post-retirement needs such as medical and living expenses.
Consistency is the key
You must decide your financial goal before choosing the investment plans in sync with your financial requirements. While there are myriad investment options to choose from, you may want to start with something basic and simple. The simplest way to save money is to drop the extra pennies from your purse into a piggy bank. It is better if you can open a savings account in a bank and allocate a defined amount to it every month from your earnings. Savings accounts do not fetch between 4 - 5 per cent, which means that Rs 100 saved today will earn an interest of Rs 5 for the year, which is not much. But think of saving the same amount every day, which means that you save Rs 3000 every month. The interest earned will be much more. Now that you have learned to save and invest, why not save your hard-earned money in options that earn more interest. After all, what is the fun of saving money when you can’t see it grow?
Putting money in provident funds
Investment options are galore, and you must choose one that meets your financial needs. Starters have a cautious approach to investments. This prompts them to opt for those that guarantee capital protection and assured returns year after year. In line with this intent, provident funds including Voluntary Provident Fund and Public Provident Fund are the most favoured among financial instruments preferred for their flexibility, secure nature, and value addition.
Voluntary Provident Fund (VPF): This fund is just an extension of the commonly known Employees’ Provident Fund (EPF) wherein both employees and employers contribute voluntarily towards the provident fund. As per EPF regulations, the employees must contribute 12 per cent of (Basic Pay + Dearness Allowance) towards the fund with a similar amount being contributed by the employer. However, employees willing to contribute over and above this basic amount may contribute towards the Voluntary Provident Fund with no similar liability to contribute over and above the mandated amount by the employer. Though these contributions towards the EPF or VPF are locked in till retirement, you may apply for premature withdrawal under various conditions. The contributions towards VPF are made in the employees’ EPF accounts. The interest rate is roughly 8.5 per cent and is subject to change as per the Employees' Provident Fund Organisation guidelines.
Public Provident Fund (PPF): This is one of the most sought after long-term savings schemes that induce customers to save small amounts of money every month or on a quarterly or yearly basis. However, the maximum amount you can save every year must not exceed Rs 1.5 lakh. The savings must be continued for 15 years though premature, partial withdrawals are allowed in certain cases. If you are someone who believes in prolonged savings, you may apply to extend the savings by five more years. The interest rate is between seven and eight per cent and subject to change every year depending on banking regulations.
Voluntary Provident Fund versus Public Provident Fund
As opposed to the limit on savings in PPF limited to Rs 1.5 lakh, there are no regulations disallowing contributions towards VPF. This means that you can deposit the entire amount (Basic Salary + Dearness Allowance) towards your VPF.
Savings in PPF accounts are allowed only for 15 years with an extension of five years allowed on submission of application. However, your VPF account stays operational even after you have retired. Also, in the event of a change of your employer, you can opt to transfer your EPF account, which means that your savings are uninhibited.
Tax implications are identical for both VPF and PPF. Similar to the EPF, contributors can benefit from the Exempt- Exempt- Exempt (EEE) feature. This means that your contributions are exempt up to Rs 1.5 lakh every year under Section 80C of the Income Tax Act 1961. Besides, both the interest earned and the maturity amounts are exempt from tax. These benefits are also true for PPF accounts that adhere to the EEE category of monetary instruments.
The author is a Journalist and a Blogger