After adjusting for income tax in the 30% bracket, VPF would still offer 5.85% return, which is higher than what other fixed investment options are currently offering.
New Delhi: The Union Budget 2021-22 proposed to tax interest earned on EPF contribution above 2.5 lakh in a year. Although this rule has made VPF investment less attractive now for high earners, it is still the best fixed investment option if you want to invest more than Rs 1.5 lakh in a year.
After adjusting for income tax in the 30% bracket, VPF would still offer 5.85% return, which is higher than what other fixed investment options are currently offering. Only Public Provident Fund (PPF) offers higher interest than VPF. But it may be noted that one can not invest more than Rs 1.50 lakh in PPF. So if you want to invest beyond Rs 1.5 lakh in a year, then VPF is still the best option. Here we have assumed that interest rate on EPF would remain unchanged at 8.5%.
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Post-tax return comparison of fixed investment options
| Investment option | Interest Rate (in%) | Post-tax return in 30% bracket |
| VPF | 8.5 | 5.8 |
| PPF | 7.1 | 7.1 |
| KVP | 6.9 | 4.7 |
| NSC | 6.8 | 4.7 |
| Bank FD | 6 | 4.1 |
However, PPF still offers some unique benefits which VPF never offers. A PPF account can be extended after the initial maturity period of 15 year in a block of five years. One can also make partial withdrawal from PPF as well. But in case of VPF, the account will stop earning interest if the amount is not withdrawn even after three years of retirement.
Change your VPF investment strategy
Experts say those who invest heavily in VPF need to change their strategy post the rule change announced in the Budget. Now you need to substract your mandatory contribution to EPF from Rs 2.5 lakh to know how much you can invest in VPF without attracting tax on EPF interest. Once your total investment in EPF and VPF reaches Rs 2.5 lakh, go for PPF, where you will get high interest than the post-tax return of EPF. If you still want to invest more after exhausting the Rs 1.5 lakh PPF limit, then you can invest in VPF.
Worth mentioning here is that EPF comes with sovereign guarantee so it is still the best fixed investment option after PPF for high salary earners.
