There is a lot of confusion regarding a suitable avenue for investments and savings plans which are safe and guaranteed to build wealth over a long period of time. Many people choose the Employee Provident Fund (EPF) that caters to company employees and has been tailored for ensuring ample financial stability after retirement.
On the other hand, fixed deposits (FDs) are accounts that are offered by banks and here, individuals can deposit money into the same for a specific period of time. These deposits are usually payable only upon completion of a fixed term/duration. VPF (Voluntary Provident Fund) is another key term that you should know. This is the provident fund where individuals can voluntarily choose to contribute a particular percentage of their salary at intervals.
For employees provident fund (EPF), individuals who are employed with organizations will hold eligibility for opening accounts. At the same time, in case of FDs (fixed deposits), all residents of the country, including minors, can open the same in case they meet the criteria of the bank where they are applying for opening the deposit in question. Only salaried individuals have eligibility for setting up VPF accounts as well. It is thus easier to open FD accounts in banks as compared to EPF accounts.
This indicates the duration for which the investment has to be locked-in, with a view towards achieving its maturity value. Lock-in or investment timeframes for FDs usually depend on the requirements of individual holders of accounts. The investment duration may vary between 7 days and 10 years, ensuring ample handling ease and flexibility for investors in turn.
EPF will remain active until the individual works as an employee at the company in question. The amount invested may be paid at the time of resignation or retirement. The same criteria are applicable in the case of VPF as well. As a result, FDs are more flexible in comparison to EPF with regard to the lock-in periods.
Rates of Interest
Interest rates are often a key factor while choosing savings and investment plans. Bank FDs usually offer anywhere between 6-8% per annum in the current scenario and company FDs may have higher rates of interest as well. The rates of interest will be fixed by the bank/financial institution in question. The EPF interest rate presently stands at 8.33% which is comparatively higher than FDs in the current scenario and this should be noted by investors.
Individuals are eligible for getting deductions up to Rs. 1,50,000 under Section 80C for investments made in VPF or EPF plans. Withdrawals from the EPF are taxable in case the individual has been employed for less than a period of 5 years with the same employer. The interest earned from FDs will attract TDS at the rate of 10% if it exceeds Rs. 10,000 per annum. There are however tax-saver FDs that have lock-in periods of 5 years which will help you save on taxes likewise.
FDs do not have any cap on the amount of investment. It all depends on your savings and the amount you can allocate for growing wealth over the years. For EPF, both employees and employers have to contribute 12% of the basic salary and daily allowance (DA) each month. This may be scaled up depending upon the employee’s needs. For VPF, employees may choose the amount to be invested as a specific percentage of their basic salary and DA without any employer contributions. All contributions will be the individual’s prerogative and are voluntary in nature.
Most banks allow withdrawals prematurely for fixed deposits (FDs) based on the policies of the respective financial institution in question. However, penalties may be charged for premature withdrawal in most cases. VPF and EPF both come with premature withdrawal facilities. In the case of EPF, premature withdrawal for those with less than 5 years of service will draw tax deductions between 20-34% subject to specific conditions.
You can easily get overdraft facilities against your fixed deposits and loan amounts can go up to 90% of the amount invested in the FD as well. Rates of interest are usually higher than present interest rates paid out on the FD by approximately 1-2%. Loans can be taken against EPF investments, subject to fulfilling specific criteria. Loans can be taken for marriage, education purposes, medical treatments, home renovation/modification, home purchases, home loan payments, lockouts, and calamities. They are also granted if the individual requires money a year prior to his/her official retirement.
Which should you ultimately choose?
Investments should always be deployed, keeping future needs in mind along with your current income and financial position. You can consider investing a major chunk of your corpus in FDs which have higher flexibility and smaller lock-in periods as compared to EPF India investments. However, keep building up the EPF corpus for your retirement as much as possible while keeping the fixed deposit investment handy for meeting long-term goals like home/car purchases and so on.
FDs are ideal investments for non-salaried or self-employed professionals who will not be eligible for investing in VPF and EPF plans. FDs can be excellent investments over and above EPF/VPF amounts for salaried professionals. It cannot be ignored that rates of interest are considerably lower for FDs in the current scenario while they remain comparatively higher and steady for EPF. As a result, if you are a salaried professional, get benefits from both investment types over a sustained time period.