EPF and PPF: Difference, Comparison, Returns & Which is Better

PF is the popular name for EPF or Employees’ Provident Fund. It is a government established savings scheme for employees of the organised sector. The EPF interest rate is declared every year by the EPFO (Employees Provident Fund Organisation) which is a statutory body under the Employees’ Provident Fund Act, 1956. For the current financial year, the interest rate on EPF account has been fixed at 8.50%. Only employees of companies registered under the EPF Act can invest in the EPF or PF. Both the employer and employee are required to contribute 12% of the employee’s basic salary and dearness allowance every month to the EPF account.

PPF or Public Provident Fund is a government-supported savings scheme. It is open to everyone – employed, self-employed, unemployed or even retired. It is not mandatory and anyone can contribute any amount to the PPF subject to a minimum of Rs 500 and maximum of Rs 1.5 lakh per year. It has a fixed return which is set by the government every quarter. You can open a PPF account with the post office or most major banks. The PPF interest rate is reviewed every quarter. The current PPF interest rate is 7.1%.

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EPF Vs PPF Comparison – Eligibility, Limits, Tenure, Interest Rate, Tax Benefits

Safety

Both are safe due to statutory backing.  But EPF is riskier due to equity exposure in it.

• Both the EPF and PPF are government-backed savings instruments
• The EPF is managed by a statutory body called the EPFO while the PPF is managed directly by the government
• 15% of the fresh money collected by the EPFO every year is invested inequities. The rest is invested in government bonds
• The EPFO declares the EPF rate every year based on the returns of the EPF corpus. The current EPF rate is 8.50% while the current PPF rate is 7.1%. Historically as well, the EPF rate has been slightly higher (8.65%) than the current rate FY 2020-21 and the current PPF rate. However, the equity exposure in the EPF makes it vulnerable to market movements. A collapse in the market may make it difficult for the EPFO to maintain the EPF interest rate.

Check EPF Interest Rate 2018-19: How to Calculate Interest on EPF

The returns of PPF are fixed and guaranteed by the government. The exact rate is set every quarter. Historically rates have fluctuated around 8% per annum. The interest rate for Jan-March 2020 was 7.9% and it is 7.1% for July to September 2020. It was 7.1% for April to June 2020 as well. Here is a brief history of PPF rates :

PPF Rates for the past 10 years

Source: National Savings Institute

PPF Calculator – PPF Interest Rate, Loan, Maturity & withdrawal Calculator

Liquidity

EPF is more liquid. Withdrawals from PPF only allowed after expiry of 5 years from account opening.

EPF Withdrawal:

• You can withdraw 75% of your EPF corpus if you have been unemployed for a period of one month. If your unemployment extends to two months, you can withdraw the entire EPF corpus. However, note that if you withdraw your EPF corpus within 5 years of account opening, the withdrawal will be taxable
• You can also simply leave the money in the EPF account even if you become unemployed or take up self-employment or work in the unorganised sector. In this case, the EPF balance will continue to earn interest but the same will be taxable. After three years, the account will stop earning interest
• The EPF retirement age is 58. Upon attaining this age, you can withdraw most of your corpus. However, a portion of the EPF corpus which is used for Employees’ Pension Scheme (EPS) will be paid to you as pension and the same will be taxable
• You can also make partial withdrawals from the EPF. However, you have to specify the reason for the withdrawal and cannot use the withdrawn funds for any other purpose. You do not have to return the amount withdrawn. These partial withdrawals are termed as loans against EPF in common parlance. However, the facility actually offered is partial withdrawal. There are different grounds for partial withdrawal and the time period for each ground is different. You can find out more about them here.

PPF Withdrawal:

• In case of PPF, you cannot withdraw money due to unemployment. PPF accounts have a term of 15 years. You can make partial withdrawals from PPF after the expiry of 6 years and start of 7th year from the year of account opening but you do not have to give any reason for the same. However, the partial withdrawal is capped
• Also, it is suggested that one should check with the respective website of the bank to determine when the partial withdrawal is allowed. Some banks, such as ICICI and Axis, allow withdrawals after 5 years and some after 7 years (SBI and HDFC)
• The maximum amount that can be withdrawn per financial year is the lower of the following:
  1. 50% of the account balance as at the end of the financial year, preceding the current year, or
  2. 50% of the account balance as at the end of the 4th financial year, preceding the current year.
• You can also get a loan against the balance in the PPF account from the 3rd to the 6th year after account opening. The maximum amount of loan that can be availed against PPF accounts is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for

Taxation

EPF withdrawal becomes taxable if withdrawn before 5 years of completed service. PPF withdrawal is not taxable.

Investment in the EPF qualifies for tax deduction under Section 80 C of the Income Tax Act up to Rs 1.5 lakh per annum. This applies to both the employer and employee contribution. Interest on the EPF is also exempt from tax unless you become unemployed. Withdrawals from the EPF are also free from tax unless you make them within 5 years of opening the EPF account. If the withdrawal amount within 5 years from the date of opening the EPF account is more than Rs 50,000, TDS is deducted from the same.

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Investment in the PPF account up to Rs 1.5 lakh per annum gets you a tax deduction under Section 80 C of the Income Tax Act, 1961. The interest on the PPF is also exempt from tax but must be declared in the annual income tax return. The PPF maturity amount is also exempt from tax. In other words, PPF enjoys ‘exempt, exempt, exempt’ tax treatment.

Drawbacks of PPF

• PPF does not allow partial withdrawals before the expiry of 5 years after the year of account opening. You cannot withdraw from the PPF before this period even if you are unemployed or need money for some family emergency. The tenure of the PPF at 15 years is also very long
• PPF historically has had a lower interest rate than EPF
• The PPF rate is fixed and over the long run can give much lower returns than equity-linked instruments like mutual funds and NPS (National Pension System)

Drawbacks of EPF

• EPF is only open to employees of companies which have registered under the EPF Act. This means companies with 20 workers or more. It is not available to self-employed or retired individuals
• The EPF contribution is rigid and fixed at 12% of salary and DA from the employer and employee. You cannot contribute less than this amount, although you can contribute more to VPF (Voluntary Provident Fund)
• Withdrawal before 5 years from account opening of EPF is taxable. In the modern economy, many people cannot keep a job in an EPF-registered company for 5 years
• If you move jobs from large to small companies or become self-employed, you cannot contribute to the EPF. In such a case, the EPF will stop earning interest after 3 years from your exit from the EPF-registered employer. Your money will lie idle in the EPF account
• The EPF rate may not match the long term returns of Mutual Funds or National Pension System (NPS)

Read about National Pension System (NPS): Eligibility, Types, Investment & Charges