EPF vs PPF – Full Form, Comparison, Returns & Which is Better

What is PF?

Types of Provident Funds:

1. Employee Provident Fund (EPF): Managed by the Employees’ Provident Fund Organization (EPFO), it is mandatory for organizations with more than 20 employees. Contributions are made by both the employee and the employer, generally at 12% of the employee’s basic salary plus dearness allowance.

2. Public Provident Fund (PPF): Open to all individuals, the PPF is a voluntary scheme where individuals make contributions. It offers attractive interest rates and tax benefits under Section 80C of the Income Tax Act.

3. General Provident Fund (GPF): This scheme is available for government employees and allows contributions from the employee’s salary.

What is EPF?

Eligibility Criteria for EPF

• The EPF scheme is open only to salaried employees working in organizations registered under the EPFO.
• Mandatory for: Organizations with more than 20 employees are required by law to enroll their employees in EPF.
• Income limit: While employees earning a basic salary of ₹15,000 or less are compulsorily enrolled, those earning more can opt-out, but this requires a formal request during the joining process.

Maturity Period for EPF

Tax Implications on EPF

• Contributions to EPF are eligible for tax deduction under Section 80C of the Income Tax Act, which allows you to save taxes on up to ₹1.5 lakh per annum.
• Interest earned on EPF balances is also tax-free, provided the employee has completed 5 years of continuous service with the same employer.
• If the service period is less than 5 years, the interest earned on the EPF balance is taxable in the year of withdrawal.

What is PPF?

Eligibility Criteria for PPF

• Any Indian resident can open a PPF account, including minors (through a guardian).
• Non-resident Indians (NRIs) are not allowed to open new PPF accounts, although they can continue contributing to an existing account.
• Account limit: An individual can open only one PPF account, except in cases where the account is opened for a minor.

Maturity Period of PPF

• The lock-in period for a PPF account is 15 years, meaning you cannot withdraw your entire balance until this period ends. However, after the 15 years, the account can be extended in blocks of 5 years.
• Partial withdrawals are allowed after the 7th year, subject to certain conditions, making PPF more flexible than EPF in terms of liquidity.

Tax Implications on PPF

• Contributions to PPF are eligible for tax deduction under Section 80C.
• The interest earned on PPF is tax-free, making it a fully exempt (EEE) scheme. The maturity proceeds (the principal and the interest earned) are also tax-free, offering a significant tax advantage.

Comparison of EPF vs. PPF

Liquidity of EPF vs. PPF

1. 1. Employees’ Provident Fund (EPF):

• You can make partial withdrawals from your EPF balance for specific purposes such as purchasing a home, higher education, or medical emergencies.
• Full withdrawal is possible only after retirement or resignation from the job.

2. 2. Public Provident Fund (PPF):

• You can make partial withdrawals from the 7th year of the investment, but they are subject to a limit.
• Loans can be taken against the PPF balance from the 3rd to the 6th year, which provides some liquidity.

The Better Option: EPF or PPF?

• EPF is better suited for salaried individuals as it involves both employee and employer contributions, providing a higher corpus for retirement. It is ideal for those who want automatic savings for retirement.
• PPF is a better option for self-employed individuals or people who don’t have access to EPF. It also provides more flexibility in terms of contributions and withdrawals.
• You can also invest in both EPF and PPF to diversify your savings strategy and leverage tax-saving benefits.

Drawbacks of Public Provident Fund (PPF)

1. 15-Year Lock-in Period: The long lock-in period may not appeal to those who need immediate access to funds.

2. Contribution Limits: The annual contribution limit of ₹1.5 lakh may not be enough for high-income earners looking for larger investments.

3. Fixed Returns: While the returns are safe, they may not be as high as equity or other market-linked investments, and inflation can erode the value over time.

Drawbacks of Employee’s Provident Fund (EPF)

1. Limited to Salaried Employees: Only salaried employees in EPFO-registered organizations are eligible to contribute to EPF.

2. Withdrawal Restrictions: Though partial withdrawals are allowed, they are subject to strict conditions, and early withdrawals are taxable if the employee has not completed 5 years of continuous service.

3. Returns May Fluctuate: While EPF generally provides a stable return, the interest rate is subject to change by the government annually, which may affect long-term returns.

Limitations of EPF and PPF

• Both EPF and PPF are long-term investments with lock-in periods, making them unsuitable for those who want quick liquidity.
• EPF depends on the employer’s involvement, which can be a limitation for those who switch jobs frequently or are self-employed.
• Both have contribution limits—EPF is limited by the employee’s salary, and PPF is capped at ₹1.5 lakh per year, which may not meet the needs of high-net-worth individuals.
• Neither EPF nor PPF offers the potential for high returns that market-linked investments like stocks or mutual funds provide.

Conclusion

• EPF is a great option for salaried employees looking for a stable, employer-supported retirement savings plan.
• PPF, with its tax-free returns and flexibility, is ideal for anyone looking for a low-risk investment option, whether salaried or self-employed.