The choice of investment tools plays an important role in shaping an individual's financial journey. Provident funds stand out as long-term savings, offering a secure source for individuals to nurture their financial well-being. Whether it is a PPF or EPF, these savings are ultimately serving as a plan for every person. So invest wisely and smartly! This article discusses two prominent financial investments – the Employee Provident Fund (EPF) and the Public Provident Fund (PPF).
What is EPF?
The Employee Provident Fund (EPF) is an important tool in India's employment landscape, providing a structured source for employees to secure their financial future. Enacted under the Employees' Provident Funds and Miscellaneous Provisions Act, of 1952, EPF is a mandatory savings scheme that aims to create financial support for employees, providing financial stability during their retirement years.
Key Features of EPF
- Mandatory Contribution: Both employees and employers contribute a certain fixed percentage of the employee's salary towards the EPF. The current contribution rate is 12% of the basic pay plus dearness allowance from both the employee and the employer.
- Accumulation and Interest: The contributions, along with interest, accumulate over the employee's tenure. Interest rates are declared annually by the government, ensuring a competitive rate of return.
- Retirement Plan: EPF serves as a retirement savings tool, providing employees with financial support after their active working years. Withdrawals are allowed upon retirement, reaching a specified age, or under specific circumstances such as unemployment.
- Tax Benefits: Under Section 80C of the Income Tax Act, contributions made towards EPF are eligible for tax deductions. Interest earned and withdrawals are also tax-free under specific conditions.
- Portability and Accessibility: EPF accounts are portable, meaning they can be transferred from one employer to another. Employees can check their EPF balance and details online through the EPFO portal.
- Withdrawal for Specific Purposes: EPF allows withdrawals for various life events such as purchasing a house, medical emergencies, or education.
- Nomination Facility: Employees have the option to nominate family members, specifying who will receive the amount in case of the employee's death.
What is PPF?
The Public Provident Fund (PPF) is a government savings scheme in India that encourages long-term financial planning. Introduced by the National Savings Institute of the Ministry of Finance in 1968, PPF is for both employed and self-employed individuals, offering a highly tax-efficient source for systematic savings.
Key Features of PPF
- Voluntary Contribution: PPF is open to all Indian citizens, making it accessible to both employed and non-employed individuals. Contributions are voluntary, allowing flexibility in deposit amounts as long as they fall within the annual limits.
- Fixed Tenure: The PPF account has a fixed tenure of 15 years, after which the tenure can be extended in blocks of 5 years. The account matures after the completion of 15 years, and the accumulated amount, along with interest, is paid out.
- Annual Contribution Limit: Individuals can contribute a minimum of ₹500 and a maximum of ₹1.5 lakh in a financial year to their PPF account. The contribution limit is per individual, irrespective of the number of PPF accounts held.
- Tax Benefits: Under Section 80C of the Income Tax Act, contributions made towards EPF are eligible for tax deductions. Interest earned and the maturity amount are exempt from income tax, enhancing the overall tax efficiency of PPF.
- Interest Rate: The interest rate on PPF is declared by the government and is calculated annually. Interest rates are generally competitive and often higher than those offered by traditional savings accounts.
- Partial Withdrawals and Loans: Partial withdrawals are permissible from the 7th year onwards, providing a degree of liquidity. Individuals can also take loans against their PPF deposits, further enhancing flexibility.
- Safe and Backed by Government: PPF is considered a low-risk investment as the government of India backs it.
EPF vs PPF
| Features | EPF | PPF |
|---|---|---|
| Interest Rate | 8.15 % | 7.1 % |
| Who can Invest | Only Salaried Employee | Anybody can invest in PPF |
| Employer Contribution | Yes | No |
| Minimum Investment | 12% of Basic Salary | Rs. 500 |
| Lock-in Period | Retirement or Resignation | 15 years, Extendable in 5 years block |
| Tax-on Withdrawal | If withdrawn before five years | No |
| Loan | Yes- Only in special cases | Yes- From 3rd Year to 6th Year |
| Tax Exemption | Yes | Yes |
| Liquidity | In case of special cases | No |
| Scheme offered by | Employee Provident Fund Organisation (EPFO) | Select public sector banks and Post Office |
EPF vs PPF - Best Option to Invest
EPF: If you are a salaried employee, contributing to EPF is important. It provides a long-term savings plan with tax benefits. However, your choices are limited as it is linked to employment.
PPF: PPF is a choice for people who are looking for long-term savings options. It offers tax-efficient returns, making it suitable for increasing investment.
What is the difference between EPF and PPF?
- EPF: It is a savings scheme for salaried employees, with contributions from both the employer and employee.
- PPF: It is a savings scheme open to all residents, providing tax benefits and flexibility.
Can I contribute to both EPF and PPF?
Yes, you can contribute to both if you are eligible for EPF (as a salaried employee) and opt for PPF as an additional savings plan.
Which one offers higher returns, EPF or PPF?
Different factors influence the returns on both EPF and PPF. EPF returns depend on the annual interest rate declared by the EPFO, while the government sets PPF returns.
Is there any flexibility in withdrawing funds from EPF and PPF?
- EPF: Withdrawals are allowed under specific conditions such as unemployment, illness, or for certain financial needs like buying a house.
- PPF: While there's a 15-year maturity period, partial withdrawals are allowed from the 7th year onwards.
Are EPF and PPF both tax-free?
Yes, both EPF and PPF offer tax benefits. Contributions, interest earned, and withdrawals are generally tax-free.