EPF Vs PPF – Difference, Taxation and Where to Invest?
Employees Provident Fund (EPF) and Public Provident Fund (PPF) are two of the most popular government-backed schemes for long-term savings. In fact, EPF vs PPF is a debate that has dominated the public discourse for a long time.
Here, we will discuss the difference between EPF and PPF, the benefits and drawbacks of each, and more.
What is an EPF Account?
Employees Provident Fund or EPF is a long-term savings scheme introduced by the Government of India to financially secure the future of employees. Every month, a portion of the monthly salary gets deducted and deposited in the employee’s EPF account. The employer is stipulated to match the amount. An employee and an employer must each contribute 12% of the employee’s basic salary and dearness allowance (if applicable) to the employee’s EPF account. Currently, the interest rate offered on EPF savings is 8.1%* p.a.
*As per news reports, EPFO has hiked the EPF interest rate for 2022-2023 deposits to 8.15%.
What is a PPF Account?
Public Provident Fund or PPF is a long-term investment and savings scheme offered by the government. You can invest as little as ₹500 and as much as ₹1.5 Lakh in PPF in a financial year. It is a relatively safe investment scheme, which currently offers an interest rate of 7.1% p.a. The Government of India revises the PPF interest rate every quarter. However, it has a lock-in period of 15 years. You can also claim deductions on your PPF investments for up to ₹1.5 Lakh per annum under Section 80C of I-T Act, 1961.
Difference Between EPF and PPF – EPF Vs PPF
| Parameters | EPF | PPF |
| Amount of Investment | 12% of one’s basic salary. The amount can increase based on employer-employee agreement | Minimum of ₹500 and maximum of ₹1,50,000 in a fiscal year |
| Eligibility Criteria | Salaried employees of a company registered under EPF Act | Resident Indians, including students, employees, self-employed professionals, and retired people |
| Tenure | Employees can close EPF accounts when they leave or change jobs. | It has a lock-in period of 15 years. It can be extended in 5-year blocks after completion of the minimum tenure. |
| Rate of Interest (As of 27th March, 2023) | 8.10%* | 7.10% |
| Lock-in Period | Till retirement – Withdrawal within 5 years of employment will have tax implications | 15 years and can be extended in 5-year blocks |
| Tax Benefits | The contribution amount is tax-deductible. The maturity amount will be tax-free after 5 years | Contribution is tax-deductible. The maturity amount is tax-free |
| Contributor | Both employer and employee | Self or parent in case of a child |
| Regulating Act/Body | Employees Provident Fund and Miscellaneous Provisions Act, 1952 | Public Sector Banks and post offices |
| Scheme Offered By | The Employees’ Provident Fund Organisation under the aegis of the Government of India | Department of Economic Affairs, Ministry of Finance of the Government of India |
| Premature Withdrawal | Partial or full withdrawal may be possible, subject to certain conditions. However, TDS won’t be deducted on completion of continuous service of at least 5 years | Up to 50% of the total savings can be withdrawn upon completing 7 years from the year in which the account was opened. However, only one partial withdrawal is permitted each year |
EPF vs PPF – Where to Invest?
EPF Vs PPF is a debate that has captured the public imagination for long. While there may be no clear winner, in many ways, an EPF account could be considered more beneficial since it receives contributions from both the subscriber and their employer. In addition, currently EPF is offering a higher interest rate. Premature withdrawal could also be slightly easier, provided certain conditions are fulfilled. However, you cannot enjoy the EPF benefits if you are self-employed or work with an organisation that is not registered under the EPF Act. In that case, you could invest in PPF to enjoy guaranteed returns. EPF investments also tend to be riskier than PPF investments because a portion of your EPF savings are invested in equities, which are subject to market risks. The other benefit of PPF is that the minimum investment amount is just ₹500 per year.
So, in short, both have unique advantages, and the suitability of each would depend on your unique circumstance and financial goals. However, it may not be a bad idea to simultaneously invest in both, if possible, to maximise your savings and tax benefits.
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EPF Vs PPF – Other Factors to Consider
Here are a few other characteristics of EPF and PPF:
1. Safety
Statutory backing makes both EPF and PPF safe options. However, EPF is considered to be slightly riskier because a portion of it is invested in equities.
Given below are important points related to the safety of investment in EPF and PPF:
- 15% of the money collected by EPFO is invested in equities every year. The rest of the amount is invested in government bonds.
- EPFO declares the EPF rate of interest every year based on the EPF corpus. As a result, it has been seen that EPF rate of interest is higher than that of PPF.
- Equity exposure makes EPF subject to market movements and volatility. Therefore, a fall in the market could affect your EPF savings.
- PPF provides the assured returns. The rate of interest is revised by the government every quarter.
2. Liquidity
While PPF comes with a lock-in period of 15 years, EPF is considerably more liquid.
1. EPF
- In India, the retirement age in the organised sector has been set at 58. One can withdraw the full amount upon retirement or withdraw 90% of the amount 1 year before retirement. EPF withdrawal is also possible upon early retirement. However, the minimum age of the subscriber should be 55 years. Another point to consider is that a portion of the amount contributed to EPF gets saved as retirement savings, which is fully taxable.
- One can withdraw 75% of their EPF corpus if they have been unemployed for one month. If the unemployment period extends up to two months, the entire EPF corpus can be withdrawn. The withdrawal will be taxable if it happens within 5 years of opening the account.
- Even if one becomes unemployed/self-employed or works in the unorganised sector, they need not withdraw their EPF savings. It will continue to earn interest, but it will become taxable. The account will cease to earn interest after 3 years though.
2. PPF
- These savings accounts have a lock-in period of 15 years, but funds can be withdrawn partially (50%) after completing a minimum of 7 years. It can also be prematurely closed if the account holder or a dependent needs the money to pay for a life-threatening disease, to pursue higher education, or if there is a change of nationality.
- One can receive loans against their PPF account balance at the beginning of the third financial year after the year in which the account was opened. However, it should be noted that the maximum loan amount cannot exceed 25% of the balance in the account at the end of the second financial year before the year in which the account holder applied for the loan. The interest rate applicable will be 1% as per PPF Exit Regulations 2021.
EPF and PPF Taxation
- Any amount withdrawn from EPF within 5 years of opening of the account, will be fully taxable. Withdrawals from PPF – partial or whole – are not taxable under Section 80C of the Income Tax Act, 1961.
- Section 80C of I-T Act enables tax deduction for EPF up to ₹1.5 Lakh for each financial year. Interest earned on EPF is tax-exempt unless the individual becomes unemployed.
- Withdrawals from EPF accounts are tax-free unless one withdraws money within 5 years of opening the account.
- TDS gets deducted if the money withdrawn from EPF account within 5 years is more than ₹50,000.
- If one invests ₹1.5 lakh in a year in the PPF account, then tax deduction is applicable under Section 80C of ITA. The interest amount is also tax-free.
Drawbacks/Limitations of EPF and PPF
- Partial and premature PPF withdrawal can be done only after 7 years. Premature account closure is permitted only under very strict conditions.
- PPF and EPF generally have a lower returns potential over a long time period when compared to market-linked investment products, such as mutual funds.
- Only the employees of EPFO-registered companies can open EPF accounts. This facility is not available for self-employed or retired people.
- The amount withdrawn from an EPF account before 5 years is taxable.
- A maximum of ₹15,000 can be contributed to EPF each month while the maximum annual contribution to PPF cannot exceed ₹1.5 Lakh. Most market-linked products have no such ceilings.
- Both EPF and PPF have low liquidity and extended lock-in periods.
Types of Provident Fund in India
The following are some common forms of provident funds in India:
1. Public Provident Fund (PPF)
This is available to everyone, irrespective of the nature of their employment. Even the unemployed can invest in this scheme. The minimum and maximum contribution limit for a financial year has been set at ₹500 and ₹1.5 Lakh respectively. It is fully tax-exempt under Section 80C of the I-T Act.
2. Recognised Provident Fund or Employees’ Provident Fund (EPF)
This is a provident fund that is set up for the welfare of an organisation’s employees, provided the organisation has more than 20 employees. The organisation can either choose to join the EPF scheme governed by EPFO or they can set up a private trust approved by the Commissioner of Income Tax (CIT).
3. Unrecognised Provident Fund
If the CIT refuses to recognise the validity of a privately managed provident fund scheme, it becomes an unrecognised provident fund.
4. Statutory Provident Fund (SPF)
The SPF is also known as the General Provident Fund (GPF). It was set up under the Provident Funds Act of 1925. It is available to employees of the government sector, railways, universities, and other government-recognised educational institutions. Private employers cannot participate in this scheme. The rate is reviewed and decided on a quarterly basis by the Government of India. Currently, the rate offered on SPF savings is 7.1% p.a.
Final Word
EPF Vs PPF is a debate that has raged on for a long time. There is no clear winner. Since both are backed by the government, they are relatively secure and can help meet your long-term goals.
However, neither is liquid. A Navi Mutual Fund scheme is extremely liquid and can be started with just ₹10. Moreover, if you stay invested for a sufficiently long period, you could maximise your returns potential. To get started, download the Navi App today.
FAQs
Both EPF and PPF accounts have strict eligibility criteria. You can open an EPF account if you are a salaried individual working at an EPFA registered company. Otherwise, you can opt for a PPF account.
The prevailing rate of interest offered by an EPF account is 8.50%, while that of a PPF account is 7.1%. The interest rate for fixed deposits ranges between 2% and 6% for general citizens. FD rate of interest is slightly higher for senior citizens. It ranges from 3% to 6.75%.
If one compares NPS with PPF, NPS offers higher returns for the investment amount that is allocated for equity trading. However, PPF offers assured but fixed returns. However, it does not provide additional benefits for the investment amount.
A Public Provident Fund scheme is not the same as a pension plan. Instead, it is a long term investment option which provides guaranteed but fixed returns. There’s a stable interest rate that is revised quarterly. PPF is entirely backed by the Government of India.
Yes, a person can have both EPF and PPF accounts. There are no restrictions that stop an EPF account holder from opening PPF. Only a salaried individual can open an EPF account. However, everyone can open a PPF account, including salaried and self-employed.
Yes, you can. However, it could only be done under specific conditions. Moreover, there could be tax implications on premature withdrawal.
PPF investments are tax-free. EPF investments could be taxed, under certain circumstances. Also, PPF is available to anyone, while EPF is not available to the self-employed, retired, and unemployed people.
No, you can’t. The maximum amount one can invest in PPF per year is set at ₹1.5 Lakh.
Yes, EPF investments can earn you an interest of 8.1 % p.a. (as of 27th March, 2023) and can help you meet your long-term financial goals.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
