EPF Vs PPF – Difference, Taxation and Where to Invest

Employees Provident Fund (EPF) and Public Provident Fund (PPF) are two of the most popular long-term Government-backed savings schemes. However, often people lack clarity with respect to their details. While EPF is a government-established savings scheme designed for the employees of the organised sector, PPF is a government-supported scheme where anyone can invest – from salaried professionals to self-employed professionals and non-professionals. 

This blog provides a detailed guide on EPF and PPF so that you can make 

What is an EPF Account?

Employees Provident Fund, the full form of EPF, is a 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 as EPF contribution and gets deposited in the employee’s EPF account. Employees and employers are required to contribute 12% of the basic wages and dearness allowance to EPF accounts. Interest rates of EPF accounts is higher than that of savings bank accounts standing at 8.10%. 

Point to note – EPF lock in period is usually till the age of retirement of resignation, however, there are tax implications if EPF is withdrawn within 5 years of employment.

The interest rate is higher in an EPF account than that of a savings bank account. The current EPF interest rate on EPF deposits stands at 8.1%. An employee can contribute a higher amount than the required minimum contribution voluntarily. But the contribution of the employer will remain unchanged. 

The primary objective of EPF is to motivate employees to build their savings for their retirement. EPF contributions are eligible for tax deduction Under Section 80C of the Income Tax Act, 1961.

What is a PPF Account?

Public Provident Fund, the full form of PPF, is a Government-backed long-term investment and savings scheme. You can start your PPF investments with just Rs.500, however, maximum PPF investments/deposits in a financial year is capped at Rs.1.5 lakh. It is considered as one of the safest, high-returns generating savings and tax-saving schemes with interest rates standing at 7.1% as of 2023. The Government of India which revises the PPF interest rates every quarter. 

Point to note – The lock-in period of PPF is 15 years. Additionally, you can claim tax benefits of up to Rs.1.5 lakh on PPF investments under Section 80C of the Income Tax Act.

Difference between EPF and PPF 

EPF vs PPF – Where to Invest?

In many ways, an EPF account can be considered more beneficial than PPF because even the employer contributes to it. In addition, EPF interest rates are higher. However, EPF becomes null and void 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 in the future. 

So, if you’re salaried and have been making PF contributions, you could simultaneously invest in a PPF as well. The minimum amount required to invest in a PPF account in a year is just Rs.500. Plan your yearly PPF investment. This could help you lead a stress-free and financially independent life post-retirement.

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 riskier because of equity exposure. 

Given below are important points related to the safety of investment 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 market will make it difficult for EPFO to maintain a high-interest rate of EPF. 
• PPF provides the assurance of 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

Given below are important points related to liquidity of EPF:

• EPF retirement age is 58. Therefore, one can withdraw most of the amount once he/she attains this age. However, there will be a portion paid to the beneficiary as a pension, and this amount is taxable. 
• One can withdraw 75% of the EPF corpus if one has 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 takes place within 5 years of opening the account. 
• Even if one becomes unemployed/self-employed or works in the unorganised sector, one can leave the money in the EPF account without withdrawing it. The balance will continue to earn interest, but it will be taxable. The account will cease to earn interest after 3 years. 

2. PPF

Given below are important points related to PPF liquidity:

• Accounts have a lock-in period of 15 years, but funds can be withdrawn partially after completing a few years. But, one will have to check with the respective bank to know details about withdrawal rules. 
• One can receive loans against PPF account balance after completing a few years. However, it should be noted that the maximum amount of loan that can be received is 25% of the balance in the account at the end of the second financial year before the year in which the individual applied for the loan.

EPF and PPF Taxation

Here are the important points related to EPF and PPF taxation:

• EPF withdrawal is taxable if one withdraws an amount before the completion of 5 years. On the other hand, withdrawals from PPF accounts are not taxable. 
• Section 80C of ITA enables tax deduction for EPF up to Rs. 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 Rs. 50,000. 
• If one invests Rs. 1.5 lakh in a year in the PPF account, then tax deduction is applicable under Section 80C of ITA. The interest amount is tax-exempt as well. PPF investment enjoys more tax benefits. 

Drawbacks/Limitations of EPF and PPF

Though both EPF and PPF are highly popular among investors due to their low-risk high-returns characteristics, there are a few drawbacks or rather limitations that you need to factor in.

• PPF does not allow for partial withdrawal before the completion of 5 years.
• PPF provides lower returns over a long term than equity-linked instruments like National Pension System (NPS) and Mutual Funds. 
• Only the employees of EPFO registered companies can open EPF accounts. This facility is not available for self-employed or retired people. 
• Returns from EPF accounts may not match those of National Pension System or Mutual Funds. 
• The amount withdrawn from an EPF account before 5 years is taxable. 

Final Word

Both EPF and PPF are effective instruments for building a savings corpus. Understand the EPF and PPF rules to make infrared investment decisions. A few additional reminders – interest rates are higher for EPF compared to PPF, however, this account can be opened by salaried individuals only. But anyone can open a PPF account which comes with a maturity period of 15 years.

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