Are you confused about the differences between EPF and PPF? Many people find it challenging to understand the pros and cons of each savings scheme.
This article will break down the key differences between EPF and PPF, so you can decide which option is best for you. So, buckle up and let’s dive in.
What is an EPF Account?
An EPF account is a savings account created for employees in India as part of their employment benefits. It is a type of Provident Fund that helps employees save money for their retirement.
Here’s how it works: A certain percentage of an employee’s salary is deducted every month, which is contributed to their EPF account.
The employer also makes a matching contribution to the account, thereby increasing the overall amount being saved. The contributions made by both the employee and the employer earn interest, which helps to grow the balance of the EPF account over time.
The EPF account is managed by the Employees’ Provident Fund Organization (EPFO), a government organisation.
The EPFO keeps track of the contributions made by the employee and the employer and manages the interest earned on the savings.
Employees can access the money saved in their EPF account at the time of their retirement or if they leave their job before retirement, subject to certain conditions.
The money can also be withdrawn in certain other situations, such as for medical emergencies or to fund the purchase of a house.
What is PPF Account?
A PPF account is a type of savings account available to Indian residents. PPF stands for Public Provident Fund, a government-backed savings scheme designed to encourage people to save money for the long term.
To open a PPF account, an individual must fill out an application form and provide proof of identity and residence.
Once the account is opened, the individual can make regular contributions to the account up to a maximum limit set by the government.
The money saved in a PPF account earns interest, compounded annually. The government sets the interest rate on PPF accounts which is typically higher than the interest rates offered by other savings accounts.
One of the benefits of a PPF account is that it is a tax-efficient way to save money. The contributions made to the account are eligible for tax deductions under Section 80C of the Income Tax Act up to a certain limit.
Another advantage of a PPF account is its long-term tenure, with a minimum period of 15 years. This makes it a great option for people who want to save money for long-term goals, such as retirement or a child’s education.
At the end of the tenure, the money saved in a PPF account can be withdrawn tax-free, and there is also an option to extend the account for a further period of 5 years.
Comparison between EPF & PPF:
Features | EPF (Employees’ Provident Fund) | PPF (Public Provident Fund) |
Eligibility | Available to salaried employees in India | Available to Indian residents |
Contributions | Employee and employer contributions, subject to certain limits | Individual contributions, subject to certain limits |
Interest Rate | The interest rate is set by the government and varies from year to year | The interest rate is set by the government and is typically higher than the interest rates offered by other savings accounts |
Tax Benefits | Contributions are eligible for tax deductions under Section 80C of the Income Tax Act | Contributions are eligible for tax deductions under Section 80C of the Income Tax Act |
Tenure | Funds can be withdrawn at the time of retirement or if the employee leaves their job before retirement, subject to certain conditions | Funds can be withdrawn tax-free at the end of the tenure (minimum of 15 years), with an option to extend the account for a further period of 5 years |
Risk | EPF investments are managed by the EPFO, which invests in government securities, bonds, and other low-risk instruments | PPF investments are managed by the government and are considered to be a low-risk investment option |
Withdrawals | Funds can be withdrawn for specific reasons, such as medical emergencies, marriage, education, or to fund the purchase of a house | Partial withdrawals are allowed after the completion of 5 years, subject to certain conditions |
Portability | EPF accounts can be transferred from one employer to another | PPF accounts can be transferred from one bank or post office to another |
EPF vs PPF - Where to Invest?
Deciding where to invest between EPF and PPF depends on various factors, such as financial goals, risk appetite, and eligibility. The following are some key points to consider when choosing between EPF and PPF:
EPF is available only to salaried employees in India, while PPF is available to all Indian residents.
Both EPF and PPF offer tax benefits under Section 80C of the Income Tax Act, which may be an important consideration for you.
EPF contributions are made by both the employee and the employer, while the individual investor makes PPF contributions.
EPF investments are managed by the Employees’ Provident Fund Organization (EPFO), while the government manages PPF investments.
EPF funds can be withdrawn at the time of retirement or under certain other conditions, while PPF funds can be withdrawn tax-free after the completion of 15 years.
EPF investments are considered low-risk, as they are invested in government securities, bonds, and other low-risk instruments. PPF investments are also considered to be low-risk.
EPF accounts can be transferred from one employer to another, while PPF accounts can be transferred from one bank or post office to another.
Ultimately, the choice between EPF and PPF depends on your personal circumstances and financial goals. If you are a salaried employee, then EPF may be the better option for you.
However, if you are a self-employed individual or not eligible for EPF, then PPF may be the better choice. It is important to research and seek professional advice before making investment decisions.
Liquidity of EPF vs PPF:
EPF and PPF offer long-term savings benefits, but there are some differences regarding liquidity.
EPF is generally less liquid than PPF, as the funds cannot be withdrawn before retirement or under certain conditions, such as medical emergencies or purchasing a house.
However, partial withdrawals may be allowed for specific reasons, subject to certain conditions.
PPF, on the other hand, allows for partial withdrawals after the completion of 5 years, subject to certain conditions.
Additionally, PPF funds can be completely withdrawn tax-free after the completion of 15 years, with an option to extend the account for a further period of 5 years.
Employees' Provident Fund:
The Employees’ Provident Fund (EPF) is a retirement savings scheme available to salaried employees in India. It is a government-managed scheme, meaning the funds are invested in government securities, bonds, and other low-risk instruments. The employer and the employee contribute to the fund, and the contributions are subject to certain limits.
The EPF scheme aims to provide financial security to employees after retirement and their families in case of their untimely death. The funds in the EPF account can be withdrawn at retirement or under certain conditions, such as medical emergencies or purchasing a house, subject to certain conditions.
EPF contributions are also eligible for tax deductions under Section 80C of the Income Tax Act. This means that the contributions made to the EPF account can be deducted from the total taxable income, thereby reducing the amount of tax payable.
Eligibility Criteria for Employees' Provident Fund:
The eligibility criteria for the Employees’ Provident Fund (EPF) in India are as follows:
Salaried Employees: Only salaried employees are eligible for the EPF scheme. This includes individuals who work in both public and private sector organisations.
Minimum Age Requirement: The employee must be at least 18 years old to be eligible for the EPF scheme.
Maximum Salary Limit: Employees with a monthly salary of up to Rs. 15,000 are eligible for the scheme. However, if the salary exceeds this limit, the employee can still opt to join the scheme, but the employer is not required to contribute to the excess amount.
Voluntary Scheme: The EPF scheme is voluntary for employees who are not eligible under the above criteria but wish to participate in the scheme.
Contractual Employees: Contractual employees are also eligible for the EPF scheme, provided they fulfill the above criteria and have worked for the same employer for at least 6 months.
Contribution to Employees' Provident Fund:
The Employees’ Provident Fund (EPF) is a savings scheme where the employee and employer contributions to the fund. The government determines the contribution rates, which are subject to change occasionally.
Employee Contribution:
The employee must contribute 12% of their basic salary, dearness allowance, and retaining allowance (if any) to the EPF.
However, if the employer is not covered under the EPF scheme, the employee must contribute 10% of their salary.
Employer Contribution:
The employer must also contribute 12% of the employee’s basic salary, dearness allowance, and retaining allowance (if any) to the EPF.
Out of the 12%, 8.33% is contributed to the Employee Pension Scheme (EPS) and the remaining 3.67% is contributed to the EPF.
Maturity Period for EPF:
The maturity period for the Employees’ Provident Fund (EPF) is linked to the retirement age of the employee. The EPF account matures when the employee attains the age of 58 years.
However, employees can withdraw the funds from their EPF account under certain conditions, such as retirement, resignation, or termination of employment.
In addition to the above conditions, employees can withdraw funds from their EPF account for various other purposes such as medical emergencies, marriage, education, purchasing a house, or any other reason deemed necessary by the government.
However, in such cases, the withdrawal amount is subject to certain limits and conditions. It is important to note premature withdrawal from the EPF account before maturity.
Tax implications on EPF:
The Employees’ Provident Fund (EPF) has certain tax implications, both at the time of contribution and at the time of withdrawal.
Tax on Contributions: The contributions made by the employee towards the EPF account are tax-deductible under Section 80C of the Income Tax Act, 1961, up to a limit of Rs. 1.5 lakh per year.
However, if the employee contributes more than 12% of their basic salary to the EPF, the excess contribution will not be eligible for a tax deduction.
Tax on Employer Contribution: The employer’s contribution to the EPF account is not taxable in the hands of the employee.
Tax on Interest Earned: The interest earned on the EPF account is tax-free.
Tax on Withdrawal: If an employee withdraws from the EPF account before the completion of 5 years, the amount withdrawn is taxable as per the employee’s tax bracket. However, if the withdrawal is made after 5 years of continuous service, the amount withdrawn is tax-free.
Tax on Pension: The pension received from the EPF account is taxable in the hands of the employee.
Lock-in Period:
The lock-in period is when an employee cannot withdraw funds from their Employees’ Provident Fund (EPF) account.
The EPF has a mandatory lock-in period of 5 years, which means that an employee cannot withdraw funds from their EPF account before 5 years of continuous service. However, there are certain exceptions to the lock-in period.
For instance, an employee can withdraw funds from their EPF account in case of emergencies such as medical emergencies, marriage, education, purchasing a house, or any other reason the government deemed necessary.
In such cases, the withdrawal amount is subject to certain limits and conditions.
Returns:
The Employees’ Provident Fund (EPF) and Public Provident Fund (PPF) offer attractive returns to investors.
The current interest rate on EPF deposits is 8.5% per annum. The government reviews this interest rate every year, which is subject to change based on prevailing market conditions.
On the other hand, the government also reviews the interest rate on PPF deposits every quarter, which is currently fixed at 7.1% per annum. The interest earned on PPF deposits is compounded annually and is tax-free.
Both EPF and PPF offer guaranteed returns and are considered safe investment options. However, the returns on these schemes may vary based on market conditions and the prevailing interest rates.
Public Provident Fund:
The Public Provident Fund (PPF) is a long-term investment scheme backed by the Indian government.
It is a savings scheme that allows individuals to deposit money into a PPF account and earn a fixed interest rate on their deposits.
The deposits made into the PPF account are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
The PPF account has a maturity period of 15 years, which can be extended in blocks of 5 years.
The government sets the interest rate on PPF deposits which is currently fixed at 7.1% per annum. The interest earned on PPF deposits is compounded annually and is tax-free.
PPF is a safe investment option and offers guaranteed returns. Individuals can open a PPF account at any authorised bank or post office in India.
The minimum deposit required to open a PPF account is Rs. 500 per year, and the maximum deposit limit is Rs. 1.5 lakh per year.
PPF is a popular investment option among individuals seeking a safe and secure investment option that provides attractive returns and tax benefits.
Eligibility criteria for Public Provident Fund:
The eligibility criteria to open a Public Provident Fund (PPF) account are as follows:
- Any resident Indian individual can open a PPF account in their name.
- A person can only have one PPF account in their name, except for an account opened on behalf of a minor.
- A PPF account can also be opened on behalf of a minor by their parent or legal guardian.
- Non-resident Indians (NRIs) are not eligible to open a new PPF account. However, if a person becomes an NRI after opening a PPF account, they can continue to hold the account until maturity. Still, they will not be allowed to make further deposits into the account.
- The minimum age limit to open a PPF account is 18 years or a minor on behalf of whom an account is opened by a parent or legal guardian.
- The maximum age limit to open a PPF account is not defined, which means that individuals of any age can open a PPF account.
- The PPF account can be opened at any authorised bank or post office in India.
Contribution to Public Provident Fund:
The minimum and maximum contributions to a Public Provident Fund (PPF) account are as follows:
- The minimum contribution required to open a PPF account is Rs. 500 annually.
- The maximum contribution allowed in a PPF account is Rs. 1.5 lakh per year.
- The contribution to the PPF account can be in a lump sum or installments.
- The contribution can be made in cash, cheque, or demand draft.
- The contribution can be made at any authorised bank or post office in India.
- The contribution to the PPF account is eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
- It is important to note that to keep the PPF account active, a minimum contribution of Rs. 500 per year is required. Failure to make this contribution for any year will make the account inactive.
- To reactivate the account, a penalty of Rs. 50 per year of inactivity will be charged, along with a minimum contribution of Rs. 500 for each year of inactivity.
Maturity Period of PPF:
The maturity period of a Public Provident Fund (PPF) account is 15 years from the end of the financial year in which the account was opened.
For example, if the account were opened on June 1, 2022, the maturity period would end on March 31, 2038.
After the maturity period, the account holder can withdraw the entire balance tax-free or extend the account for 5 years.
During the extension period, the account holder can make additional contributions to the account, but withdrawals are restricted. The extension can be done for any number of blocks of 5 years.
It is important to note that if the PPF account is not closed or extended after maturity, the balance will continue to earn interest at the prevailing rate until the account is closed.
Tax Implications on PPF:
There are various tax implications associated with a Public Provident Fund (PPF) account. The below are some key points to consider:
Tax benefits on contributions: The contributions made to the PPF account are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
This means that up to Rs. 1.5 lakh of the contributions made in a financial year can be claimed as a deduction from the taxable income.
Tax-free interest: The interest earned on the PPF account is tax-free.
Tax-free maturity amount: The maturity amount received from the PPF account is also tax-free.
Premature withdrawals: Partial withdrawals from the PPF account are allowed after the completion of 5 years from the end of the financial year in which the account was opened. Such withdrawals are subject to certain conditions and restrictions, and any amount withdrawn is not taxable.
Inactive accounts: If the minimum contribution of Rs. 500 is not made in a financial year, the PPF account becomes inactive.
The account can be reactivated by paying a penalty of Rs. 50 for each year of inactivity, along with the minimum contribution amount for each year.
NRI taxation: If the account holder becomes a non-resident Indian (NRI) during the tenure of the PPF account, the account can be continued till maturity, but the contributions made after becoming an NRI are not eligible for tax benefits.
The interest earned on the account after becoming an NRI is taxable.
Difference Between EPF and PPF:
EPF and PPF are popular savings schemes in India but have some key differences. There are a few major differences between EPF and PPF:
Eligibility: EPF is available to salaried employees who work in organizations with 20 or more employees, whereas PPF is available to all Indian citizens, including salaried employees, self-employed individuals, and even minors.
Contribution: The contribution to EPF is made by both the employee and the employer, whereas the PPF contribution is made solely by the account holder.
Maturity Period: The maturity period for EPF is linked to employment, and the amount accumulated in the account can be withdrawn after retirement or leaving the job.
In contrast, PPF has a fixed maturity period of 15 years, after which the account holder can either withdraw the entire balance or extend the account in blocks of 5 years.
Interest Rate: The interest rate on EPF is decided by the government and is currently fixed at 8.5% per annum, whereas the government also fixes the interest rate on PPF but can vary from year to year. Currently, the interest rate on PPF is 7.1% per annum.
Tax Implications: Both EPF and PPF offer tax benefits, but the nature of tax benefits differs. While the contributions made to EPF are tax-deductible under Section 80C of the Income Tax Act, the interest earned and the amount withdrawn are taxable under certain conditions.
In contrast, the contributions and the interest earned on PPF are tax-free, and the amount withdrawn is also tax-free.
Liquidity: EPF offers limited liquidity, as withdrawals can only be made under certain conditions, such as retirement, resignation, or in case of a medical emergency.
On the other hand, PPF allows partial withdrawals after the completion of 5 years, and the account can also be closed prematurely under certain conditions.
Limitations of EPF and PPF:
The below are a few limitations of EPF and PPF:
Limitations of EPF:
Limited Liquidity: EPF offers limited liquidity, as withdrawals can only be made under certain conditions, such as retirement, resignation, or in case of a medical emergency.
This can be a disadvantage for those who require funds for unforeseen expenses.
Dependency on The Employer: EPF is linked to employment, and the employee and the employer contribute. This can disadvantage those who are self-employed or have irregular income.
Fixed Interest Rate: The interest rate on EPF is fixed by the government and is currently at 8.5% per annum. While this rate is competitive, it does not allow flexibility based on market conditions.
Long Lock-In Period: PPF has a fixed lock-in period of 15 years, and premature withdrawal is only allowed under certain conditions. This can be a disadvantage for those who require funds in the short term.
Contribution Limit: The maximum contribution to PPF is Rs. 1.5 lakh per annum can be a limitation for those who want to save more.
Fixed Interest Rate: The interest rate on PPF is fixed by the government and can vary yearly. While this rate is competitive, it does not allow flexibility based on market conditions.
Lock-in Period:
The lock-in period is when an investment is locked and cannot be withdrawn. In the case of EPF and PPF, both schemes have a lock-in period, which means the funds cannot be withdrawn before a specified period.
The lock-in period for EPF is until the retirement of the employee, which is usually at the age of 58 years.
However, partial withdrawals are allowed under certain conditions such as marriage, education, and medical treatment.
The lock-in period for PPF is 15 years from the date of account opening. However, partial withdrawals can be made from the 7th year onward.
Returns:
Returns refer to the profit or earnings generated by an investment. In the case of EPF and PPF, both schemes offer a fixed rate of interest that is decided by the government every year.
The current rate of interest on EPF is 8.5% per annum. This interest rate is credited to the account at the end of every financial year and is compounded annually.
The current rate of interest on PPF is also 7.1% per annum. This interest rate is also credited to the account at the end of every financial year and is compounded annually.
EPF and PPF Taxation:
EPF and PPF both provide tax benefits on contributions and interest earned.
In the case of EPF, the money you put into it can be claimed as a tax deduction under Section 80C of the Income Tax Act.
The money contributed by the employer is also tax-free up to a certain limit. The interest earned on your EPF balance is also tax-free.
However, if you withdraw your EPF balance before 5 years of service, the entire amount will be taxed as per your income tax slab rate.
If the withdrawal is made after completing 5 years of service, but before the age of 58 years, then the withdrawal amount is tax-free, subject to certain conditions.
In the case of PPF, the contributions made by an individual can be claimed as a tax deduction under Section 80C of the Income Tax Act. The interest earned on the PPF balance is also tax-free.
Moreover, the entire PPF balance can be withdrawn tax-free after 15 years of the account’s opening.
However, partial withdrawals made during the lock-in period may attract tax implications.
Drawbacks / Limitations of EPF and PPF:
While EPF and PPF are popular investment options, they also have some drawbacks and limitations that investors should be aware of:
Limited Investment Flexibility:
Both EPF and PPF have limited investment flexibility as the funds can only be invested in fixed-income instruments, such as government bonds, and do not provide exposure to equity markets.
Lock-In Periods:
Both EPF and PPF have lock-in periods, which means that the funds are not easily accessible until a certain period. For EPF, the lock-in period is till retirement or resignation, while for PPF, the lock-in period is 15 years.
Low-Interest Rates:
While EPF and PPF offer fixed returns, the interest rates may not always be competitive compared to other investment options.
Contribution Limits:
Both EPF and PPF have contribution limits, which means that investors cannot invest beyond a certain amount in a financial year.
Taxation Rules:
The taxation rules for EPF and PPF are subject to change, which may impact the returns on these investments. Moreover, the government may also restrict the tax benefits on EPF and PPF in the future.
Conclusion:
EPF and PPF are popular investment options in India, each with advantages and disadvantages. While EPF offers the benefit of employer contribution and low-risk investment, PPF provides more flexibility in terms of investment and tax benefits.
Ultimately, the choice between EPF and PPF depends on individual financial goals, investment horizon, and risk appetite.
Investors need to evaluate the features of both options carefully before deciding and seek guidance from a financial advisor to make an informed investment choice.
Frequently Asked Questions (FAQs)
EPF is a retirement savings scheme managed by the government for employees in India, while PPF is a long-term investment option available to all citizens of India.
Yes, an individual can simultaneously have EPF and PPF accounts, subject to the contribution limits and other eligibility criteria.
Withdrawals from EPF are generally allowed only after retirement or resignation from the job. In contrast, withdrawals from PPF are allowed after the completion of the lock-in period of 15 years, subject to certain conditions.
The interest rates for EPF and PPF are subject to change every financial year. As of 2021-2022, the interest rate for EPF is 8.50% per annum, while for PPF, it is 7.10% per annum.
The choice between EPF and PPF depends on individual financial goals, investment horizon, and risk appetite. Both options have advantages and disadvantages, and investors should evaluate them carefully before deciding.