VPF vs NPS

Updated on 24 Oct, 2023

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A Voluntary Provident Fund (VPF) is a regular provident fund plan in which a depositor can choose how much he wants to contribute to the fund on a regular basis. VPF has a five year lock-in period. The National Pension System (NPS) is a long-term, voluntary investment plan that helps you create a corpus for your retirement. You can withdraw the NPS corpus amount once you are 60 years. The article highlights the key differences between VPF Vs NPS.

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Difference Between VPF and NPS

Basis of Difference	VPF	NPS
Maturity Period	Upon Retirement	60 years or 70 years
Interest Rate	8.50% p.a.	NPS returns vary according to the stock and bond market movements.NPS returns also vary according to the exposure to equity and debt.The average return on NPS investments is around 9.00% to 12.00% p.a..
Safety of Investment	Since the government backs VPF, the investments are considered to be safe.	NPS investments are market-linked. Hence they carry a certain amount of risk.
Eligibility	All Indian employees are eligible for VPF investments.	All Indian citizens between 18 and 65 years can invest in the NPS Tier 1 account. Only NPS Tier 1 subscribers can invest in NPS Tier 2 accounts.
Contribution	Minimum of 12% of employee’s salary up to 100%.	The minimum investment to keep the account active is INR 500.
Tax Benefits	VPF investments up to INR 1,50,000 are tax-deductible under Section 80C of the Income Tax Act 1961.	Investments up to INR 1,50,000 each financial year are tax-deductible under Section 80C of the Income Tax Act, 1961. Additional investments up to INR 50,000 are tax-deductible under Section 80CCD (1B) of the Income Tax Act, 1961. On maturity, the whole pension fund balance is tax-free.
Premature Withdrawals	VPF allows premature withdrawals. However, only under certain circumstances before 5 years.	You cannot withdraw funds until you reach the age of 60.Partial withdrawals are permitted if you invest at least 80% of the NPS assets in an annuity plan. After the age of 60, withdrawals demand a 40% investment in an annuity.

VPF vs NPS – Which is Better Option for Retirement?

The Voluntary Provident Fund (VPF) is a voluntary scheme where salaried individuals can choose the amount they want to contribute to the program. An employee must contribute to the EPF at a rate greater than the employer’s contribution of more than 12%. The sum could be as much as 100% of the basic pay plus dearness allowance. It’s worth noting that no one has a separate VPF account; instead, your VPF account is linked to your EPF account. VPF accounts have a 5 year lock-in period. Furthermore, any partial withdrawals made within five years, which are permitted under specific conditions, will be subject to tax deductions.

On the other hand, the National Pension Scheme (NPS) is a pension cum savings scheme. The scheme invests in equities, corporate bonds, and government bonds. Account-holders can make partial withdrawals for the first three years after starting the account. Only after reaching the age of 60 may you withdraw the entire amount, but you can extend the maturity term by another ten years. Individuals can take just 25% of their payments for particular purposes like housing, a child’s education, or illness.

Which scheme is better between the two depends on your investment objective. If you are looking for long term schemes that invest across market-linked securities, NPS may be a suitable option. On the other hand, VPF can be a suitable option if you wish to earn stable returns.

Conclusion

A VPF account is only available to salaried persons and thus isn’t accessible to everyone. On the other hand, NPS is available to all Indian citizens. Furthermore, NPS offers a diversified investment portfolio that invests across equities and fixed income securities. Thus, making NPS a risky investment option. As a result, the returns are higher compared to VPF. If you are an investor who is willing to undertake certain risks, then NPS is a good option. Though both schemes are suitable for retirement, assess your risk tolerance levels, investment horizon and goals before you pick a scheme for investment.

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