difference between NPS and VPF

Difference between National Pension Scheme and Voluntary Provident Fund

Finance Investment

If you are a salaried professional in India, then you must be aware of schemes like EPF, VPF, NPS, and so on. All these schemes are meant to save a considerable amount of money on taxes and grow your fortune. 

Anybody who wants to secure their future and save money must invest in investment plans. After all, planning for retirement is necessary because you probably won’t be having any active income source then.

In this article, we will talk about two such investment schemes: VPF and NPS. Both VPF and NPS help you save a corpus for your future. But before you choose between the two, it is important to understand the difference between them. So, let’s get started!

What is the National Pension Scheme (NPS)?

The National Pension Scheme (NPS) was launched by the Government to provide individuals with a monthly pension after their retirement. This scheme invests your money into various market-linked securities and as a result, your corpus grows. The minimum investment required to open an NPS account is INR 500. 

The NPS scheme requires you to stay invested in it until you reach the age of retirement, i.e., 60. After that, 60% of the corpus can be withdrawn and the remaining 40% is invested in an annuity to provide you with your monthly pension. You can also invest the entire maturity corpus in an annuity.  

Keep in mind that the withdrawn amount and your annuity income is taxable. But, the amount invested in the annuity is not.  

What is the Voluntary Provident Fund (VPF)?

Voluntary Provident Fund (VPF) is a type of account opened voluntarily by an employee to save over and above their EPF. This type of account is available to salaried individuals only who have a specific salary account. Self-employed individuals and people working in unorganized sectors are not allowed to open a VPF account. 

The contribution towards such account must be over and above 12% of what it is towards EPF. The upper maximum contribution limit is 100% of the employee’s basic salary and dearness allowance. VPF can be considered to be an extended EPF account. The difference here is that the employee or the employer doesn’t need to contribute to this type of fund. As the name suggests, it is a scheme that an employee can take up voluntarily as it isn’t mandatory.

National Pension System (NPS) Vs (Voluntary Provident Fund)

Sl. No. Features NPS VPF
1. Maturity Period When the investor attains 60 years of age Upon retirement
2. Interest Rate 12% to 14% (depends on the performance market-linked instruments) 8.50% for the Q4 FY 2019-20. (Decided by the govt.)
3. Investment Safety Low risk. Depends on market performance Risk-free (Backed by the govt.)
4. Eligibility Indian citizens + NRIs Indian salaried individuals
5. Contribution Minimum: INR 500 per month 

No maximum limit

>12% of the employee’s salary
6. Tax Benefits Tax benefits up to INR 1.5 lakhs on contributions as per the Section 80C. In addition to that, an additional INR 50,000 contribution is allowed.  Tax benefits up to INR 1.5 lakhs on contributions as per the Section 80C
7. Pre-Withdrawal options 20% of the total NPS corpus (before retirement) after 3 years of staying invested Partial withdrawals allowed only under specific conditions. Can be withdrawn only after 5 years of staying invested.
8.  EPF account You don’t need an EPF account for this investment Having an EPF account is mandatory for this scheme
9. Pension benefits Provides a monthly pension after you retire Doesn’t provide any pension
10. Maturity Amount Depends on the performance of the assets invested in Fixed maturity amount
11. Investment period Up to retirement You need to invest until retirement or your resignation, whichever is earlier.
12.  Loan facility You cannot take up loans against your NPS Loan facility is available
13.  Annuity Pension Plan Purchasing an annuity plan after maturity is mandatory Annuity pension plan is not available
14. Taxability of Maturity Amount The percentage of maturity corpus used to buy an annuity is not taxed. Rest of the amount and the annuity income is taxable as per your income slab. After 5 continuous years of service, the maturity amount is exempted from taxes.
15.  Account There is one unique account for every individual’s NPS You don’t need a separate account for VPF because it is linked to your EPF account

Final Verdict

VPF is ideal for all those salaried individuals who want to invest more than what they are already investing in their EPF accounts. On the other hand, NPS is a great plan to secure your life after retirement. It offers higher returns as well but also involves a certain amount of risk.

Moreover, the NPS scheme offers extremely low liquidity and hence, is ideal when thought of as a pension plan. Individuals with a higher annual income should consider investing in VPF over NPS since the maturity amount from VPS has an EEE status.

NPS or VPF – Which one do you prefer? Let us know in the comments below!