As the financial year comes to an end, all salaried employees get themselves working on their investments that help in tax deduction. It is better to plan your finances well in advance than wait for the year to end. The Government of India has introduced various tax-saving schemes that offer multiple benefits to salaried employees. If you are planning to invest your funds in any of the saving schemes available, you must be well aware of the features, benefits and drawbacks that these schemes bring along.
Difference Between EPF, PPF, VPF and NPS
Before you invest in any of the available saving scheme options, it is advised that you carefully understand the difference between all of them and then make an informed and wise decision. Given below are detailed features of individual schemes along with the benefits that they offer.
|Maturity Period||Upon retirement||Upon retirement||Upon retirement||After 60 or 70 years of age|
|Interest offered||Decided by Govt; 8.50% in Q4 FY19-20||Decided by Ministry of Finance, 7.9% in Q4 FY 19-20||Same as EPF||Ranges from 12%-14% depending upon fund’s performance|
|Safety of Investment||Government-backed, safe||Government-backed, safe||Government-backed, safe||Relatively Safe investments, depending upon market fluctuations|
|Eligibility||All Indian employees||All Indian citizens, except NRIs||All Indian employees||Any individual|
|Contribution||12% of employee’s basic and dearness by employee and employer, each||Any amount between Rs.500 and Rs.1.5 Lakh||More than 12% of employee’s salary upto 100%||Minimum Rs.6000; no maximum limit|
|Tax Benefits||Tax-free upto Rs. 1.5 Lakh||Tax-free upto Rs. 1.5 Lakh||Tax-free upto Rs. 1.5 Lakh||Tax-free upto Rs. 1.5 Lakh|
|Pre-withdrawal options||Partial withdrawals, under specific conditions before 5 years subject to TDS deduction||Partial withdrawals under specific conditions after completion of 5 or 7 years||Partial withdrawals, under specific conditions before 5 years||Only 20% of the total amount before retirement|
Understanding Employee Provident Fund
Introduced under the Employee’s Provident Fund and Miscellaneous Act, 1952, the saving scheme can be referred to the collection of funds by the employee and the employer at regular intervals for the benefit of the employee’s post-retirement needs.
- Under the EPF scheme, both the employee and the employer submit 12% of the employee’s basic and dearness allowance to the employee’s PF account, every month
- While the employee contributes a total of 12% to his/her EPF account, the employer contributes 8.33% towards employee’s EPS (Employee Pension Scheme) and the remaining 3.67% towards EPF
- It must be noted that throughout the lifetime of an employee, he must have only one PF account. Upon changing of jobs, the employee must transfer his PF account from the previous employer to his current one
- EPF aims at encouraging the idea of savings among the salaried employees on a monthly basis
- The Employee Provident Fund Office (EPFO) offers a fixed level of interest on the amount in the PF account of an employee. For Q4 FY 19-20, the interest on PF has been fixed at 8.50%
- The amount of interest to be received on EPF amount, along with the principal amount collected is entirely tax-free
- Additionally, in case of unfortunate death of the account holder, the accrued amount can also be withdrawn by his nominee or legal heir
- Employees can easily track their EPF balance, and access their EPF account on the government-backed EPF portal using the UAN provided by the employer
- The employee can withdraw his EPF amount only after retirement. However, under certain emergencies (such as medical illness, payment of house loan, child’s marriage, child’s education, etc.), EPFO allows partial withdrawals from the PF account by the employee. You can also withdraw your EPF amount only if you haven’t received wages for 2 months.
Understanding Public Provident Fund
A Public Provident Fund (PPF) is a tax-free savings scheme offered by the government of India. Since this is a government-backed scheme, PPF is considered one of the safest modes of investment accounting to its safety and delivery of fixed returns.
- An individual must be an indian citizen in order to be eligible to invest in PPF and can open his account at any post office, nationalized bank or any major private bank
- After completing 5 years of investment in a PPF account, individuals are allowed to make partial withdrawals under certain specific circumstances
- Under a PPF account, the interest is set for every quarter individually and is paid by the government. The interest for Q4 FY 19-20 is set at 7.9%
- Investments made in a PPF account are entirely free of risk, as the returns are fixed and are paid by the government
- Under Section 80C of the Income Tax Act, PPF investments offer a tax deduction of Rs.1.5Lakh in a financial year
- Moreover, PPF account holders are also eligible for a loan against the amount gathered in their PPF account from 3rd year to 6th year of investing
- The PPF account has a lock-in period of 15 years, which implies that an employee is not eligible to withdraw the amount in his PPF account before the said time period
- Investors can make only upto 12 deposits a year in one PPF account and not more
- Employees can contribute no more than Rs.1.5 Lakh to a PPF account in one financial year. The minimum amount to be contributed is Rs.500
- Partial withdrawals depend on the bank that you have your account with. Some banks allow withdrawals after the 5th financial year and others after the 7th financial year
Understanding Voluntary Provident Fund
Going by the name, a Voluntary Provident Fund (VPF) is a regular provident fund scheme wherein a depositor can electively decide the amount that he wishes to contribute towards the scheme on a regular basis.
- Under this scheme, the contribution should mandatorily be over and above 12% made by the employer on the employee’s behalf
- Even though the employee is not bound to contribute any specific amount to the scheme, he can choose to contribute a full amount (100%) of his basic salary as well as dearness allowance
- It must be noted that there is no separate VPF account for any employee. It is, instead, linked to his/her EPF account. Hence, an individual must mandatorily have an EPF account in order to open a VPF account
- An employee is entitled to the final maturity of the amount only at the time of resignation or retirement from the job
- The interest offered on a voluntary provident fund is fixed as per the EPF scheme, and the interest earned is credited to the employee’s EPF account only. For Q4 FY 19-20, the interest rate has been fixed at 8.50%
- VPF account holders are eligible for partial withdrawals or loans against the deposits under certain conditions
- Withdrawals made from VPF account after 5 years are subject to tax exemption
- Only salaried individuals can access a VPF account, and at any given point time in the financial year
- VPF account has a lock-in period of 5 years, and there is no option of premature withdrawal of the entire amount before the fixed time period.
- The interest offered on investments in VPF are declared by the government in the annual budget, implying the fluctuation in interest rates
- It must be noted that the withdrawals will be subject to tax deductions if made before 5 years
Understanding National Pension System
Earlier known as National Pension Scheme, NPS or National Pension System is a pension system aiming to invest the contributions of its subscribers into various market-linked instruments such as equities and debts of various organizations.
- National Pension System is regulated and administered by the Pension Fund Regulatory Authority of India (PFRDA)
- Any Indian citizen between the ages of 18-60 is eligible to open a NPS account
- The contributions to NPS can be invested in up to 4 classes, equities, corporate bonds, government bonds, and alternative assets through various pension funds
- Each pension funds deliver individual returns depending upon its performance
- Account holders are eligible to make partial withdrawals after 3 years of opening the account that account holders can make
- NPS subscribers can claim tax benefits of upto Rs. 1.5 Lakh under Section 80C of the Income Tax Act
- There is no fixed interest rate offered on the investments under this scheme. However, the interest offered on the investment varies from 12%-14%
- The final pension amount given to the investor depends upon the performance and returns offered by the funds
- The funds invested in an NPS can be withdrawn only after the age of 60. However, account holders can choose to extend the maturity period till the age of 70
- Individuals can withdraw an amount equal to only 25% of the contributions made for specific purposes such as buying of a house, child’s education or any illness
Each of these saving schemes offers varied benefits and carries different features. Depending upon factors such as liquidity, amount to be invested, need for withdrawal, returns offered, etc. you can make a wise and informed decision as to which scheme you wish to invest in.