VPF vs EPF: What is the difference? Which one will give you a higher interest rate?
The Employees' Provident Fund and the Voluntary Provident Fund serve as one of the essential tools for retirement income. While contributing to EPF is mandatory, you can choose to contribute towards a VPF account for higher savings.
The Employees' Provident Fund (EPF) and Voluntary Provident Fund (VPF) can help in building a sizable retirement corpus for salaried individuals. These tools also provide substantial interest on your contribution, making them the perfect choice for retirement planning. While the intent of both these tools are almost same, their features are quite different. Therefore, let's delve deeper into the differences between EPF and VPF.
What is the Employees' Provident Fund (EPF)?
The EPF refers to a provident fund managed by the Employees' Provident Fund Organisation (EPFO) that is created to support salary earners after retirement. The employee makes a contribution of 12 per cent of basic pay plus dearness allowance towards this scheme and the employer matches this contribution. Out of the employer's contribution, 8.33 per cent is transferred to the Employee Pension Scheme (EPS) and the rest 3.67 per cent is transferred to the EPF account.
What is the Voluntary Provident Fund (VPF)?
VPF is an extension of EPF. Here, the employee isn't restricted to a 12 per cent contribution and can make a maximum contribution of 100 per cent of their basic pay along with dearness allowance. The employer doesn't make any contribution under this scheme.
VPF vs EPF: What is the difference?
- Tax Implications: After Budget 2021, if the employee’s contribution to EPF is above Rs 2.5 lakh in a financial year the interest earned on the excess amount will be taxable. This also includes any contribution under VPF. So, both the VPF and EPF contributions by the employee should remain within Rs 2.5 limit to claim the tax benefits on interest earned. Apart from this, the EPF contribution is also taxable under two conditions- if the interest rate is more than 9.5 per cent and if the employer contribution exceeds the Rs 7.5 lakh in a financial year.
- Mandatory vs Voluntary Participation: While having an EPF account is mandatory, it isn't the case with the VPF accounts. One can choose to have a VPF account to create a higher retirement corpus.
- Contributors: The employee and employer both contribute to the EPF while only the employee can contribute towards the VPF.
- Contribution Cap: There is a 12 per cent limit on EPF contributions. However, one can contribute 100 per cent of their basic salary plus dearness allowance towards VPF.
VPF vs EPF: Which of them give you a higher interest rate?
Both the EPF and VPF offer 8.15 per cent of interest on contributions. However, the VPF could eventually provide better returns to your contribution as you can make higher contributions compared to the EPF. Since EPF contributions are capped at a maximum of 12 per cent of basic pay plus dearness allowance, you can choose to put in a higher amount than this into a VPF account to get better returns.