I apologize upfront for the dry nature of this blog post. I cannot do much about a topic which is actually very boring except make it short.
Let us go through the basics:
VPF is something only salaried folks can sign up for via their employers. So if you are "on a break", "self-employed", "doing business" or "working for a stealth startup", VPF is irrelevant. Simply put, VPF is a top up over and above the regular contribution to Employee's provident fund, and hence the name "Voluntary" PF. The extra contribution has to be requested via your employer. But to be clear, it is your contribution that is going there and nothing from your employer - just in case you thought you could swing a "hidden raise" from your employer.
PPF is an independent scheme for anyone to open, where there is a limit of INR 1.5Lacs per year, funds are locked in for 15 years (with some exceptions), the interest/withdrawal is tax exempt. Hence the name "Public" PF . More about PPF here
Okay then, so till a couple of years ago, you could have pumped money into VPF and not worried about it attracting tax. But now, interest on any contribution beyond INR 2.5Lakhs will be taxed in your hands. Interest is credited at 8.1% as per the latest rates applicable, so net of tax, that is about 5.42% after tax for that excess contribution. (Assuming you have 33% tax slab).
So my suggestion is this - if you want to squirrel away funds quietly, max out your VPF contribution to 2.5 Lakhs. If you want to increase it further, go for it but know that there are likely better options to lock in your funds for a long term horizon, given the taxability is at your applicable rate. Be prepared to have a drop in your take home salary though.
PPF is also a good silent saving maxed out at 1.5Lakhs per year which I like because of its tax free nature. 7.1% interest without tax is nothing to scoff at.
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