EPF vs VPF vs PPF vs NPS: The Ultimate Fixed-Income Hierarchy

The ₹1.5 Lakh Question

Every March, the same panic hits millions of salaried Indians.

"I need to save tax! Should I put money in PPF? Or NPS? My colleague says VPF is better. My CA says EPF is enough. My dad says LIC. My YouTube guru says ELSS. WHO DO I LISTEN TO?"

You scramble to invest ₹1.5 Lakhs in random instruments before March 31st. You don't know WHY you picked what you picked. You just know the number on your Form 16 got smaller.

Congratulations. You just built a retirement plan with the same strategy a monkey uses to throw darts at a board.

There is a correct order in which to fill your fixed-income buckets. It is not opinion. It is pure math. And today, we are going to decode the entire hierarchy from first principles.

By the end of this article, you will know EXACTLY which instrument to max out first, which to use second, and which is a trap disguised as a tax-saver.

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Part 1: The Playing Field (Know Your Instruments)

Before we compare, let's understand what each instrument actually does. Think of these four as four different lockers at a bank. They all store your money. But the interest rate, lock-in period, and tax treatment are wildly different.

🏦 EPF (Employee Provident Fund)

Who can use it: Only salaried employees. How it works: Every month, 12% of your Basic Salary is deducted from your paycheck and deposited into your EPF account. Your employer matches this 12% (though 8.33% of their share goes to EPS pension, and only 3.67% to your EPF balance). Current Interest Rate: 8.25% per annum (FY 2023-24 rate, declared by EPFO). Tax Status: EEE (Exempt-Exempt-Exempt). Contributions get 80C deduction. Interest is tax-free. Withdrawal after 5 years of continuous service is fully tax-free. Lock-in: Till retirement (age 58). Partial withdrawal allowed for specific purposes (home loan, medical, marriage).

Think of EPF as the autopilot. You don't have to do anything. Money goes in automatically. It earns 8.25% tax-free. It is the single best deal the Indian government offers to salaried workers.

💰 VPF (Voluntary Provident Fund)

Who can use it: Only salaried employees who already have EPF. How it works: You tell your HR department: "Hey, instead of deducting only 12% of my Basic for EPF, please deduct 20% (or 30%, or even 100%)." The extra contribution above the mandatory 12% goes into VPF. Current Interest Rate: 8.25% per annum (SAME as EPF. It is the same pot of money). Tax Status: EEE (Same as EPF). Lock-in: Same as EPF.

Think of VPF as the "Turbo" button on your EPF. Same engine, same fuel, same destination. You just press the accelerator harder.

🛡️ PPF (Public Provident Fund)

Who can use it: ANY Indian citizen (salaried, self-employed, freelancers, housewives, retired persons). How it works: You open a PPF account at a bank or post office. You deposit a minimum of ₹500 and a maximum of ₹1.5 Lakhs per year. Current Interest Rate: 7.1% per annum (set by the government, revised quarterly). Tax Status: EEE (Exempt-Exempt-Exempt). Fully tax-free at all three stages. Lock-in: 15 years. Partial withdrawals allowed from Year 7 onwards. Loans against balance allowed from Year 3.

Think of PPF as the "Bunker." It is the safest fixed-income instrument in India, backed by the sovereign guarantee of the Government of India. Nothing can touch your money here. Not even you, for 15 years.

🔥 NPS (National Pension System)

Who can use it: ANY Indian citizen between 18-70 years. How it works: You open an NPS account. You choose how to split your money between Equity (E), Corporate Bonds (C), and Government Securities (G). A professional fund manager invests it for you. Current Returns: Varies. The Equity (E) portion has historically delivered 10-12% over 10 years. The Government Bond (G) portion delivers ~8%. The blended return depends on your allocation. Tax Status: EET (Exempt-Exempt-Taxed). Contributions get 80C deduction. Growth is tax-free. BUT, 40% of the maturity amount MUST be used to buy an annuity, and the annuity income IS taxable as salary. Lock-in: Till age 60. Early exit allowed after 5 years (but 80% must go to annuity). Bonus: Extra ₹50,000 deduction under Section 80CCD(1B) — this is OVER AND ABOVE the ₹1.5 Lakh 80C limit!

Think of NPS as a "Hybrid Sports Car." It is the only instrument on this list that has an equity component. It can go fast (high returns), but it also has a mandatory toll booth at the end (the 40% annuity rule).

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Part 2: The Head-to-Head Comparison Table

Let's put them side by side so you can see the differences clearly.

The first thing that jumps out: EPF and VPF are strictly better than PPF for salaried employees. Same EEE tax status. Higher interest rate (8.25% vs 7.1%). It is not even close.

So why does everyone keep opening PPF accounts?

Because most people don't know VPF exists.

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Part 3: The Correct Filling Order (The Hierarchy)

Here is the optimal order to deploy your money. Follow this like a recipe.

Step 1: Let EPF Do Its Job (Automatic)

You don't have a choice here. If you are salaried, 12% of your Basic Salary goes to EPF automatically. Let's say your Basic Salary is ₹50,000/month.

• •Your EPF contribution: ₹6,000/month = ₹72,000/year.
• •Your 80C limit used: ₹72,000 out of ₹1,50,000.
• •Remaining 80C space: ₹78,000.

Action: Do nothing. This happens on autopilot. Just make sure your UAN is active and linked to Aadhaar.

Step 2: Max Out VPF (The Hidden Gem)

Now you have ₹78,000 of 80C space left. Before you even THINK about PPF, tell your HR to increase your EPF contribution.

Why? Because VPF gives you 8.25% EEE vs PPF's 7.1% EEE. For the same tax benefit, VPF earns you 1.15% more interest per year. That 1.15% compounds into a massive difference over 25-30 years.

The Math (₹78,000 invested per year for 25 years):

• •In VPF at 8.25%: You accumulate ₹60.3 Lakhs.
• •In PPF at 7.1%: You accumulate ₹52.8 Lakhs.
• •Difference: ₹7.5 Lakhs extra — just by choosing VPF over PPF.

Same tax benefit. Same risk (zero). Same lock-in. But ₹7.5 Lakhs richer. Why would you NOT do this?

Action: Email your HR today. Ask them to increase your EPF deduction to cover the remaining 80C limit. Most companies allow this through a simple form or HR portal request.

⚠️ Important Caveat: The ₹2.5 Lakh Threshold From FY 2021-22, the government introduced a rule: Interest earned on EPF/VPF contributions exceeding ₹2.5 Lakhs per year is TAXABLE at your slab rate.

So if your total EPF + VPF contribution exceeds ₹2.5 Lakhs/year (which means a Basic Salary above ~₹1.7 Lakhs/month), the excess interest loses its EEE status.

For most people earning under ₹20 LPA CTC, this threshold is irrelevant. But for high earners, once you cross ₹2.5L in EPF+VPF, switch to PPF for the remaining amount.

Step 3: Open PPF (The Universal Safety Net)

Use PPF in these scenarios:

1. •You are self-employed or a freelancer: You don't have access to EPF/VPF. PPF is your primary fixed-income instrument.
2. •You have maxed out VPF: Your EPF+VPF already fills the ₹1.5L 80C limit. You want additional long-term savings.
3. •You have crossed the ₹2.5L EPF threshold: For high earners, PPF's interest remains 100% tax-free regardless of amount.

PPF is also useful for its 15-year lock-in. If you are the kind of person who raids their savings for impulsive purchases, PPF is the financial equivalent of putting your money in a vault and swallowing the key.

Action: Open a PPF account at your bank (SBI, HDFC, ICICI all offer it). Deposit between ₹500 and ₹1.5L per year. The ideal deposit date is the 1st to 5th of every month (PPF interest is calculated on the lowest balance between the 5th and end of month).

Step 4: NPS — ONLY for the Extra ₹50K Deduction

NPS is NOT in the same category as EPF/VPF/PPF. It is a market-linked product. Comparing NPS to PPF is like comparing a motorcycle to a bicycle — they serve different purposes.

Why NPS makes the list: Section 80CCD(1B) gives you an ADDITIONAL ₹50,000 tax deduction that is ABOVE the ₹1.5 Lakh 80C ceiling.

If you are in the 30% tax bracket, this saves you:

• •₹50,000 x 30% = ₹15,000 in pure tax savings per year.
• •Over 25 years at 10% return (with equity allocation), that ₹50K annual investment grows to approximately ₹54 Lakhs.

The NPS Trap: The Mandatory 40% Annuity When you turn 60, you can withdraw 60% of your NPS as a tax-free lump sum. But the remaining 40% MUST be used to buy an annuity (a monthly pension plan from an insurance company).

Here is the problem: Annuity rates in India are terrible. A ₹1 Crore annuity gives you roughly ₹50,000-₹60,000 per month. That is a 6-7% annual return — less than what a simple FD gives you. And the annuity income is taxed as salary.

You are basically forced to lock 40% of your life savings into a product that earns less than inflation, and then pay tax on the pathetic returns.

The Smart NPS Strategy:

1. •Invest ONLY ₹50,000/year (to claim the 80CCD(1B) deduction).
2. •Choose Aggressive allocation (75% Equity, 15% Corporate Bonds, 10% G-Secs) if you are under 40.
3. •Don't put more than ₹50K. Any amount above ₹50K doesn't give you any extra tax benefit over what EPF/PPF already provides, and you are voluntarily locking your money into the annuity trap.

Action: Open NPS on the eNPS portal (enps.nsdl.com). Choose Tier-1 Account. Select a Pension Fund Manager (SBI, LIC, or HDFC are the popular choices). Set a standing instruction of ₹4,167/month.

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Part 4: The Complete Playbook (By Salary Level)

Let's put it all together with three real-world examples.

Scenario A: Fresh Graduate (CTC ₹8 LPA)

• •Basic Salary: ₹33,000/month.
• •Mandatory EPF: ₹3,960/month = ₹47,520/year.
• •Remaining 80C: ₹1,02,480.
• •Action: Increase VPF by ₹8,540/month to fill the remaining ₹1,02,480. Your total EPF+VPF becomes ₹1,50,000. Done.
• •NPS: Skip it. At this salary, your tax bracket is likely 5-10%. The ₹50K NPS deduction saves you only ₹2,500-₹5,000. Not worth the lock-in. Invest that ₹50K in ELSS or Index Funds instead.

Scenario B: Mid-Career Professional (CTC ₹25 LPA)

• •Basic Salary: ₹1,04,000/month.
• •Mandatory EPF: ₹12,480/month = ₹1,49,760/year.
• •Remaining 80C: Just ₹240!
• •Action: Your EPF almost fills the entire 80C limit on its own. No need for VPF or PPF for tax saving.
• •NPS: YES. Invest ₹50,000/year in NPS Tier 1 for the 80CCD(1B) deduction. At 30% bracket, this saves ₹15,600 in tax. Worth it.
• •Bonus: Open a PPF account and invest ₹1.5L/year as a pure wealth-building tool (not for 80C, since that is already full). The interest is still 100% tax-free.

Scenario C: Senior Leader (CTC ₹50 LPA)

• •Basic Salary: ₹2,08,000/month.
• •Mandatory EPF: ₹24,960/month = ₹2,99,520/year.
• •Result: Your EPF itself exceeds the ₹2.5L threshold. Interest on the ₹49,520 excess is now taxable.
• •Action: Consider NOT increasing to VPF (since interest above ₹2.5L is taxed). Instead, open a PPF for ₹1.5L/year (PPF interest remains fully tax-free regardless).
• •NPS: YES. ₹50K for the 80CCD(1B) deduction. At the highest slab with surcharge, this saves you close to ₹20,000.

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Part 5: The Myths That Cost You Money

Myth 1: "PPF is the best tax-saving instrument."

Reality: For salaried employees, VPF is better. Period. PPF is the best ONLY if you are self-employed or have already maxed VPF.

Myth 2: "NPS gives higher returns than PPF, so it is better."

Reality: NPS returns are higher because it invests in equity. You are taking market risk. Comparing NPS to PPF is comparing apples to motorcycles. And the forced 40% annuity is a massive penalty that nobody talks about. If you want equity exposure, use an Index Fund or ELSS — they have NO annuity trap and NO lock-in till 60.

Myth 3: "I should max out the ₹1.5L 80C limit in PPF."

Reality: Check if your EPF already fills most of that ₹1.5L limit. For anyone with a Basic Salary above ₹62,500/month, your EPF alone fills the entire 80C. Adding PPF on top gives you zero additional tax benefit (but the investment is still great for long-term wealth building since the returns are tax-free).

Myth 4: "EPF is a bad investment because I can't access it till 58."

Reality: EPF allows partial withdrawals for home purchase (after 5 years), medical emergencies, and education. Also, the lock-in is a FEATURE, not a bug. It forces you to save. If your EPF was freely withdrawable like a savings account, most people would raid it to buy the iPhone 23 Ultra Max Pro.

Myth 5: "NPS Tier 2 is like a Mutual Fund."

Reality: NPS Tier 2 has no lock-in and no tax benefit (for non-government employees). Its only advantage is ultra-low expense ratios (0.01% vs 1% for Mutual Funds). We covered this in our NPS Tier 2 article — it is a power tool for advanced investors, not a replacement for PPF.

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Part 6: The Decision Flowchart

Follow this flowchart to never waste another tax-saving rupee:

Are you salaried?

• •YES → Your EPF is already active. Check your payslip for the annual contribution.
  • •Is your EPF contribution less than ₹1.5L/year? → Increase VPF to fill the 80C gap.
  • •Is your EPF contribution already ₹1.5L+? → Skip VPF. Open PPF for long-term wealth building (not for 80C).
  • •Are you in the 30% tax bracket? → Add ₹50K to NPS for the extra 80CCD(1B) deduction.
• •NO (Self-Employed/Freelancer) → You don't have EPF/VPF.
  • •Max PPF at ₹1.5L/year. This is your primary 80C + fixed-income instrument.
  • •Add ₹50K to NPS if you want the extra deduction.

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The Verdict: The Definitive Hierarchy

Here is the final pecking order, set in stone:

Tier 1 (Do This First): EPF → VPF (Same 8.25%, EEE, Zero Risk) Tier 2 (Do This Second): PPF (7.1%, EEE, Zero Risk, Universal Access) Tier 3 (Do This For Tax Alpha): NPS only ₹50K/year (For the 80CCD(1B) extra deduction) Never Do This: Max out NPS beyond ₹50K, or use NPS as your primary retirement plan. The 40% mandatory annuity is a trap.

The single biggest mistake Indians make is opening a PPF when they should be increasing VPF. It costs them ₹5-10 Lakhs over a lifetime.

Don't be that person. Open your HR portal, raise your EPF contribution, and let the power of 8.25% tax-free compounding do the rest.

The boring path is the richest path.