EPF vs PPF

What is an EPF account?

An EPF account is a retirement savings scheme for salaried individuals in India. It is a government-backed scheme managed by the Employee Provident Fund Organisation (EPFO) and has been implemented under the Employees' Provident Funds and Miscellaneous Provisions Act 1952. Under this scheme, employees and employers contribute 12% of the employee's basic salary towards the EPF account, accumulating over time. 

The government decides the interest rate for EPF, which currently stands at 8.5%. An EPF account primarily ensures financial security for employees in their retirement years and during sudden conditions such as medical emergencies or job loss. Furthermore, it provides tax benefits, making it an enticing investment avenue for those who receive a regular salary.

What is a PPF account?

The Public Provident Fund, often called PPF, is a long-term savings scheme accessible to individuals across India. This financial opportunity was established in 1968, with the National Savings Institute, a Ministry of Finance division, overseeing its implementation. 

The PPF operates by the legal framework defined in the Public Provident Fund Act of 1968. This scheme allows individuals to invest a minimum of Rs. 500 and a maximum of Rs. 1.5 lakh per year for 15 years with an option to extend it in blocks of 5 years. PPF offers attractive interest rates, currently at 7.1% and compounded annually. 

The main goal of a PPF account is to promote long-term savings and provide financial stability to respective individuals. The PPF account also comes with tax benefits under Section 80C of the Income Tax Act.

Difference Between EPF and PPF

EPF and PPF are two popular investment options in India that offer guaranteed returns with tax benefits. However, there are significant differences between EPF and PPF schemes. One of the main differences between EPF and PPF is their eligibility criteria. While EPF is only available to salaried individuals, PPF can be availed by all individuals, including self-employed individuals. Another key difference is the contribution amount. 

In EPF, both the employee and employer contribute 12% of the employee's basic salary towards the account, while in PPF, individuals can invest a maximum of Rs. 1.5 lakh per year. When comparing epf vs ppf, you should know how they deal with interest rates. Employee Provident Fund (EPF): EPF's interest rate is 8.5%, and the government sets this.

Public Provident Fund (PPF): It offers an interest rate of 7.1%, compounded annually. Regarding liquidity, PPF is more flexible than EPF as it allows partial withdrawals after the completion of the 6th year. In contrast, EPF only allows withdrawals in certain circumstances, such as retirement or unemployment. Additionally, PPF accounts can be extended in blocks of five years, while EPF accounts cannot be extended after age 58.

Taxation

One of the major factors to consider while comparing epf vs ppf is their taxation policies. Both schemes offer tax benefits but differ in terms of when and how they can be availed.

EPF offers tax exemptions at three stages - contribution, accumulation, and withdrawal. The contributions made towards EPF are eligible for a tax reduction under the Section of 80C of the Income Tax Act. The interest earned on EPF is also tax-free, and withdrawals made after 5 years are exempted from income tax.

On the other hand, PPF also offers tax benefits at all three stages. The contributions towards PPF are eligible for tax deductions under Section 80C, and the interest earned is also completely tax-free. However, withdrawals from PPF are tax-free only at the time of maturity.
In terms of taxation, both EPF and PPF offer attractive benefits, making them ideal long-term investment options for individuals.

Liquidity

Liquidity refers to the convenience of converting an investment into cash without impacting its market value, and it holds significant importance when deciding on an investment choice. This is because it enables individuals to address their immediate financial requirements.

In terms of liquidity, PPF offers more flexibility compared to EPF. PPF accounts allow partial withdrawals after the completion of the 6th year, whereas EPF only allows withdrawals in certain circumstances, such as retirement or unemployment. Additionally, PPF accounts can be extended in blocks of five years after maturity, giving individuals more control over their investments. Moreover, the interest earned on PPF is compounded yearly and credited to the account at the end of each financial year. Individuals can withdraw some of their accumulated interest without affecting the principal amount.

In contrast, EPF offers limited liquidity as it is primarily a retirement savings scheme. The funds in EPF are intended to be utilized only after the employee's retirement or during unpredicted circumstances such as a medical emergency or loss of employment. Furthermore, unlike PPF, withdrawals from EPF are subject to certain tax implications. If an individual withdraws their EPF balance before completing 5 years of continuous service, it will be taxable as per their income tax slab. However, withdrawals made after a continuous period of 5 years are exempted from income tax.

Another thing to think about is the interest rates these schemes provide. Right now, PPF has an interest rate of 7.1%, which is decent. However, EPF offers an even better interest rate set by the government, currently at 8.5%. This makes EPF look more appealing for long-term investments, even though accessing your money may not be as easy as PPF.

It is also worth noting that PPF and EPF accounts can be transferred from a employer or bank to another, making them highly flexible regarding investments. However, the transfer process for EPF might take longer than PPF as it involves multiple parties, including the employer and employee. While EPF and PPF offer guaranteed returns with tax benefits, PPF offers more liquidity than EPF. However, it is essential to consider other factors, such as interest rates, eligibility criteria, and tax implications, before choosing either of these schemes.
 

Limitations of EPF and PPF

Some of the limitations of EPF and PPF are:

    • Eligibility Criteria: As mentioned earlier, EPF is only available to salaried individuals, while all individuals can avail of PPF. This makes EPF inaccessible for self-employed individuals or those with irregular income. 
    • Contribution Limits: Both EPF and PPF offer tax benefits on contributions. However, there is an upper limit to the amount you can be invested. Regarding EPF, only 12% of your salary is directed to the account, which may not be enough for individuals with higher incomes. Similarly, PPF has a maximum limit on contributions. It is set at Rs. 1.5 lakh per year.
    • Long Lock-in Period: EPF and PPF have a long lock-in period. It is 15 years. While this ensures forced savings for individuals, it might not suit those looking for short-term investments.
    • Limited Investment Options: The main objective of both EPF and PPF is to provide retirement benefits, which means the investment options are limited. Individuals who prefer higher-risk investment options might not find these schemes suitable. 
    • Tax Implications on Withdrawals: As mentioned earlier, withdrawals from EPF are subject to tax implications if made before the completion of 5 years. Similarly, PPF accounts can only be closed after completion of 15 years, and any premature closure will attract a penalty. While both EPF and PPF offer attractive benefits for long-term investments, these limitations must be considered before deciding.

Conclusion

EPF and PPF are well-known choices for people looking to save for the long haul while enjoying tax advantages. Both plans have appealing perks like tax breaks, assured returns, and the option to transfer funds. While comparing epf vs ppf, it's important to consider how they line up with your financial goals. 

Finance experts advise you to actively monitor your investment portfolio. By consistently reviewing your investments and making the required tweaks, you can ensure they stay in tune with your evolving financial needs. Being proactive in this way will enhance your capacity to reach your long-term financial aspirations. 

So, it is crucial to carefully assess the factors mentioned above and choose the scheme that lines you with your financial goals and risk appetite. Therefore, EPF and PPF have unique features and limitations, making them suitable for different individuals based on their financial needs. Ultimately, making an informed decision between these two schemes is imperative to secure a financially stable future.