PF vs. PPF: Determining the Best Option

The Government of India has introduced a number of saving plans with the goal of encouraging financial literacy among the populace. The Provident Fund (PF) is one well-known savings plan. The savings plan may be required or optional. While the Public Provident Fund (PPF) is optional, the Employee Provident Fund (EPF), also known as PF, is required. Each of these plans has a unique set of features and advantages. Continue reading to learn about the specifics of both plans, as well as the main distinctions between EPF and PPF. You can also compare their eligibility requirements, interest rates, limitations, tenure, tax benefits, and other features.

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Table of Contents

What is EPF?

What is PPF?

PF vs. PPF: Which is Safer

Liquidity of PF and PPF

PF vs. PPF: From a Taxation Perspective

Drawbacks of PF and PPF

PF vs. PPF: Which is Better?

Conclusion

Frequently Asked Questions (FAQs)

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What is EPF?

Employees who work for qualified organisations are required to have their pay deducted from the Employees' Provident Fund (EPF). This sum is deposited into the employee's EPF account, and the employer will also make a specific contribution. EPF's primary goal is to support workers in saving and building up a sizeable retirement fund so they can maintain their financial independence. According to the Employees' Provident Fund and Miscellaneous Act of 1952, the Employees' Provident Fund Organisation (EPFO) is in charge of managing EPF. The sum in the EPF account is far more than what is offered by a standard savings bank account and yields an alluring rate of return. According to Section 80C of the Income Tax Act of 1961, the EPF contributions are deductible from taxes.

What is PPF?

The Public Provident Fund, or PPF, is a savings plan that is backed by the government. Everyone is welcome, including those who are self-employed, employed, unemployed, or even retired. Anyone can contribute any amount to the PPF, with a minimum of Rs 500 and a maximum of Rs 1.5 lakh annually, but it is not required. Every quarter, the government sets a fixed return for it. The majority of major banks and the post office both allow you to open a PPF account. Every quarter, the PPF interest rate is examined. The PPF interest rate is currently 7.1%.

PF vs. PPF: A Comparative Analysis

The following table offers an in-depth comparative analysis between PF and PPF based on specific criteria:

Criteria	PF	PPF
Who can invest?	Salaried employees working with recognised organisations	All individuals, including the ones working in the informal sector
Contributor	Both employer and employee	Self
Maximum investment	No capping on voluntary contribution by employees, but the employer’s contribution remains the same	Rs 1,50,000 per annum
Minimum investment	12% of the basic salary	Rs 500 c
Current interest rate	8.50% per annum	7.10% per annum
Lock-in period	Till retirement	15 years
Regulating Act	Employees Provident Fund and Miscellaneous Provisions Act, 1952.	Government Savings Banks Act, 1873 (priorly known as Public Provident Fund Act, 1968)
Scheme offered by	Employee Provident Fund Organization (EPFO)	Select public sector banks and Post Office
Tax Benefits	Deduction on contribution.  Maturity amount is tax-free but only after 5 years.	Deduction u/s 80C for contributions.  Maturity amount is tax-free.

PF vs. PPF: Which is Safer

Because of legislative support, both are secure. However, EPF's equity exposure makes it riskier. The PPF and EPF are both government-sponsored savings plans. The government directly manages the PPF, but the EPFO, a statutory agency, oversees the EPF. 15% of the new funds that the EPFO receives each year are invested in stocks. Government bonds are used to invest the remaining funds. 

Based on the EPF corpus's returns, the EPFO announces the EPF rate annually. Currently, the PPF rate is 7.1% and the EPF rate is 8.25%. Additionally, historically, the EPF rate has been marginally higher (8.65%) than both the present PPF rate and the current rate for FY 2023–2024. However, the EPF is susceptible to changes in the market due to its equity exposure. The EPFO might find it challenging to keep the EPF interest rate stable if the market collapses.

Liquidity of PF and PPF

With EPF, if you are jobless for one month, you can withdraw 75% of your EPF campus; if you are unemployed for two months, you can withdraw your whole corpus. In certain situations, you may also choose to leave the money in the account, but all withdrawals will be subject to taxes and interest will cease to accrue after three months. 

When it comes to PPF, there is a 15-year lock-in term and you are unable to withdraw money because of unemployment. Generally speaking, partial withdrawals are permitted starting in the seventh year; however, see your bank's website for information on withdrawal limits and other restrictions.

PF vs. PPF: From a Taxation Perspective

If an EPF withdrawal is made prior to five years of service completion, it becomes taxable. Withdrawals from PPF are not taxable. Section 80 C of the Income Tax Act allows for an annual tax deduction of up to Rs 1.5 lakh for EPF investments. Both the employer's and the employee's contributions are covered by this. Unless you lose your job, interest on the EPF is likewise tax-free. Additionally, withdrawals from the EPF are tax-free as long as they are made within five years of the account's establishment. TDS is subtracted from all withdrawals made within five years of the EPF account's opening date that total more than Rs 50,000.

You can receive a tax deduction under Section 80 C of the Income Tax Act, 1961, if you invest up to Rs 1.5 lakh annually in a PPF account. Although it must be disclosed on the yearly income tax return, the interest on the PPF is likewise tax-exempt. Additionally, the PPF maturity amount is tax-exempt. Put differently, PPF is entitled to "exempt, exempt, exempt" tax relief.

Drawbacks of PF and PPF

Employees of businesses that have registered under the EPF Act are the only ones eligible to participate in EPF. This refers to businesses that employ 20 people or more. Self-employed people and retirees are not eligible. The EPF contribution is set at 12% of the employee's and employer's salaries and benefits. Although you can make larger contributions to the Voluntary Provident Fund (VPF), you are not permitted to make smaller contributions. Withdrawals made prior to five years from the EPF account opening date are subject to taxes. The long-term returns of mutual funds and the National Pension System (NPS) can be higher than the EPF rate.

Partial withdrawals are not permitted by PPF until five years have passed since the account was opened. Even if you need money for a family emergency or are unemployed, you cannot take money out of the PPF before this time. The PPF has a 15-year duration, which is likewise fairly long. Historically, PPF has offered lower interest rates than EPF. Compared to equity-linked products like mutual funds and the National Pension System (NPS), the PPF rate is fixed and may yield significantly lower returns over time.

PF vs. PPF: Which is Better?

Making an informed choice might be aided by being aware of the salient characteristics of each plan. The Employee Provident Fund (EPF) was created especially for professionals who receive salaries. It functions as a required savings plan in which a portion of your pay is withheld and used to fund the creation of a retirement corpus. EPF has the benefit of automated deductions, which eliminate the need for you to actively set aside money from your pay cheque. You can take money out of your EPF account in the event of unanticipated events like unemployment.

However, with a 15-year duration, the Public Provident Fund (PPF) is an optional investment choice. It enables people to establish a retirement corpus by making flexible contributions. If necessary, PPF also provides the advantage of being able to borrow money against the amount deposited. In addition, beyond the initial 15-year period, the PPF account's duration can be extended in 5-year increments.

Conclusion

EPF and PPF are both government programs. Section 80C of the Income Tax Act of 1961 covers several tax-saving measures. Both plans are supported by the sovereign guarantee, and people are free to select the one that best suits their needs. When deciding between EPF and PPF, it's critical to thoroughly consider your preferences, risk tolerance, and financial objectives. Think about things like interest rates, withdrawal flexibility, convenience of contribution, and the particular advantages that suit your needs.

FAQ

Q1. What is the purpose of EPF and PPF?

Both PPF and EPF are long-term savings plans with guaranteed returns that are supported by the government. In order to address a variety of purposes, they were created to promote modest savings, generate returns on those investments, and gradually accumulate a sizeable corpus.

Q2. What are the eligibility criteria for investing in PF and PPF?

While EPF is only available to salaried professionals working for a company registered under the EPF Act, PPF is accessible to Indian residents.

Q3. What is the tenure for PPF and is it possible to extend it?

PPF has a fifteen-year term. After the first 15-year period, it can be extended in 5-year increments.

Q4. Which companies have a mandatory EPF?

Employers with more than 20 workers are required to provide their workers with EPF benefits.

Q5. Who contributes to the PPF scheme?

Contributions to a PPF account must be made by the individual.

Q6. What is the difference between the interest rates of EPF and PPF?

Yes, the interest rates for PPF and EPF for the fiscal year 2023–2024 are 7.1% and 8.25%, respectively.

Q7. Is EPF a mandatory saving scheme?

For salaried workers in businesses with 20 or more employees, EPF is required.

Q8. What are the tax benefits related to PPF and EPF?

Section 80C of the Income Tax Act allows for the tax deduction of contributions made to both PPF and EPF. For both choices, the sum after maturity is tax-free. However, tax-free status for EPF is only valid once five years have passed.

Q9. When can one can withdraw funds from PPF and EPF?

While EPF allows full withdrawals at retirement or in the event of unemployment, PPF only authorises partial withdrawals following the conclusion of six fiscal years. Partial withdrawals from the EPF are also permitted for marriages, home purchases, loan repayment, home remodelling, and further education.