Money, it is that one thing around which our lives and the world revolve. Everything we do in our lives is either directly or indirectly connected to the act of earning, saving or spending money, with money ruling the roost in our day to day activities. Money is the harbinger of news, sometimes good and sometimes bad, turning normal people into Gods, wielding power like no other weapon. The fact is that there is no modern world without money, unless we are all willing to give it all up and lead the life of a hermit.
So we work hard to earn money, putting in blood, sweat and tears to life a decent life, but the thing about money is that it somehow evades us when we need it most. A good savings plan can offer some comfort, helping us believe that there is a back-up in case of financial emergencies, but finding the right back-up can be a difficult task. Money is hard to earn and easy to spend, so a good savings plan could mean the difference between a peaceful retirement and a tension filled life.
Fixed Deposits and Provident Funds are two popular investment and saving tools in India, both offering multiple benefits to people. Provident Funds are government supported retirement planning schemes, wherein individuals have the opportunity to invest in different kinds of provident funds. The Employee Provident Fund (EPF) and Voluntary Provident Fund (VPF) are two popular Provident Fund investment modes in India.
So which investment opportunity is better? FD, EPF or VPF? The following points could possibly help YOUR money hold its value during financial needs.
Fixed Deposits are accounts offered by banks wherein individuals can deposit money into the account for a particular time period. These deposits are generally payable only when the term is completed.
Employee Provident Fund is a provident fund for employees of companies, which is designed to provide financial stability post retirement.
Voluntary Provident Fund is a provident fund wherein individuals can choose to voluntarily contribute some percentage of their salary towards it.
Fixed Deposits – FDs can be opened by all residents, including minors, if they meet the eligibility criteria of the bank they wish to apply in. A few companies offer Company Fixed Deposit, which are open to individuals and are governed by the rules of the company.
EPF – Individuals who are employees of organisations are eligible to open an Employee Provident Fund account.
VPF – Only salaried individuals can open a Voluntary Provident Fund account.
The lock in period refers to the time duration involved for a particular investment to reach its maturity value.
FD – The Investment / Lock in period for FDs depends on the needs and requirements of the individual account holder. The investment term could range from 7 days to 10 years, offering flexibility and ease of handling to the investor.
EPF – The EPF is active till the individual concerned is an employee of the organisation. The invested amount can be paid either at retirement or on resignation.
VPF – This account is active till the individual is an employee of the organisation. The invested amount can be paid either at retirement or on resignation.
Thus FDs offer ease and flexibility in terms of investment period compared to EPFs and VPFs.
The interest rate offered on investments is often the biggest deciding factor when choosing which option to pick. Bank fixed deposits offer interest rates ranging between 8.5 to 9% per annum, with company fixed deposits offering much higher rates, often ranging between 12-13% per annum. The interest rates are fixed by the individual bank or company concerned and often reflect the competitive nature of business.
The interest rates for PFs, including EPF and VPF are fixed by the government and currently stand at 8.75% per annum. These rates can be revised only by the government at its sole discretion.
It so happens that we often feel reluctant to part with our hard earned money, but paying tax is the duty of every individual who falls in the tax bracket. While one cannot avoid tax completely, FDs and PFs offer us the chance to reduce our tax burden to an extent. Individuals can claim deduction under section 80C of the Income Tax Act in case of Tax Saving Fixed Deposits, with the maximum deduction being Rs. 1.5 lakh.
Investments towards EPF and VPF are also eligible for deduction under Section 80C. Withdrawals from EPF are, however, taxed if the individual has been employed with the same employer for less than 5 years.
Planning for the future is an extremely crucial aspect of investing and miscalculating the investment amount could leave us hanging in the future. FDs have no limit on the investment amount, with the investments depending on the capability of the individual concerned. Some banks are open to investments running into crores, with the investment amounts being subject to the policies followed by the banks.
In case of EPF, both the employer and employee are expected to contribute 12% of the basic and DA every month. The contribution can be increased as per the needs of the employee. In VPFs the employee can choose the amount he/she wishes to invest, as a percentage of their DA and Basic Salary, with no contribution from the employer. Contributions to VPF are voluntary and are up to the individual concerned.
Most banks allow premature withdrawals of Fixed Deposits, subject to the policies of the bank and can charge a certain fine on such premature withdrawals.
Premature withdrawals are permitted for EPF and VPF, though premature withdrawal of EPF with service less than five years would attract tax deductions, ranging from 20% to 34%, depending on certain conditions.
Financial emergencies can arise at any moment and loans can often quell them temporarily. Most banks offer an overdraft facility against FDs, with the loan amount being as high as 90% of the amount in the FD. The interest rate on these loans is generally 1-2% higher than the current interest rate being paid on the FD.
Individuals can avail loans against their EPF/PPF amount, subject to them meeting certain criteria. Loans against these are available only for 9 reasons, education, marriage, medical treatment, home purchase, home modifications, lockouts, home-loan payments, calamities and if the individual needs money one year before his/her retirement.
The table below mentions the differences between FDs, EPFs and VPFs.
|Eligibility||Open to all||Only Salaried Individuals||Only Salaried Individuals|
|Investment Period||7 days to 10 years||Till retirement or resignation||Till retirement or resignation|
|Interest Rates (Per annum)||8.5-9% for bank FDs and 12-13% for company FDs||8.75%||8.75%|
|Tax Benefits||Available under Section 80C||Available under Section 80C||Available under Section 80C|
|Investment Amount||Flexible||12% Basic + DA by both employee and employer||Voluntary|
|Loans||Available||Available for certain needs||Available for certain needs|
Investments should be done keeping in mind future requirements and current income, and both FDs and PFs (EPF and VPF) offer excellent features to investors. FDs can be an additional investment for individuals above their investments in EPF or VPF. For non-salaried individuals, an FD is the best form of investment as they are not eligible to invest in EPF and VPF.
FDs offer more convenience and flexibility in terms of the investment amount and individuals can customise it to suit their financial needs, with the higher interest rate helping their money grow faster when compared to EPF or VPF. The investment term options make FDs more attractive, as the term can be chosen based on current needs, allowing people the opportunity to financially plan for even short term needs, which is hard to do in case of EPF and VPF.
A lifetime of hard work could dematerialize in one reckless moment and life isn’t always kind to provide second chances. Investing in the right plan ensures safety of not just your money but also your family and way of life. FDs, EPFs and VPFs are unique in their own way, and not investing in them could come back to haunt us. They help our money grow with us, so that we can have something to fall back to in our old age or times of distress.