The introduction of several saving schemes by the Government of India aims at fostering financial wisdom amongst the general population. One notable saving scheme is Provident fund(PF). The savings scheme can either compulsory or voluntary. The Employee Provident Fund(EPF) is mandatory, while Public Provident Fund(PPF) is the voluntary.
The Government of India will pay the employer and employee contribution to the EPF account of employees for another three months from June to August 2020. The benefit is for establishments with up to 100 employees and where 90% of those employees draw a salary of less than Rs 15,000 per month.
The contribution to EPF is reduced to 10% from 12% for non-government organisations. Employees’ Provident Fund (EPF) is generally referred to as PF. This fund exists to help employees accumulate a considerable sum for their retirement. PF is a government-backed scheme and offers an attractive rate of return at 8.5% for FY 2020-21. We have covered the following in this article:
What is EPF
Employees’ Provident Fund (EPF) is a compulsory deduction in the salaries of employees working in eligible organisations. This amount is deposited into the EPF account of the employee, and the employer shall also contribute with a certain amount. The main intention of EPF is to help employees save and accumulate a significant sum of money for their retired life so that they remain financially independent. EPF is managed by the Employees’ Provident Fund Organisation (EPFO) as per the Employees’ Provident Fund and Miscellaneous Act, 1952.
The amount in the EPF account earns an attractive rate of return, and it is much higher than what a regular savings bank account provides. If an employee wants to contribute a higher amount than the minimum required contribution, then that excess contribution is termed as ‘Voluntary Provident Fund’. However, the employer’s contribution will still remain the same. The EPF contributions are eligible for tax deductions under the provisions of Section 80C of the Income Tax Act, 1961.
What is PPF
Public Provident Fund (PPF) is a popular savings scheme offered by the government. It is one of the most popular tax-saving investment options covered under Section 80C. The main reason behind the introduction of PPF is to help individuals working in all sectors (including informal jobs) save and invest small amounts whenever they want. The PPF account offers a higher return than savings bank accounts.
The catch here is that the investments in PPF accounts are lock-in for a period of 15 years. One can invest a maximum of Rs 1,50,000 a year or Rs 12,500 a month. A minimum investment amount of Rs 500 should be compulsorily made in a year. The taxpayers can avail of tax deductions of up to Rs 1,50,000 a year and can save up to Rs 46,800 in taxes.
Comparison of PF with PPF
| Parameter | EPF | PPF |
| Who can invest? | Salaried employees of the recognised organisations | All individuals, including those in the informal sector |
| Contributor | Both employee and employer | Self |
| Minimum investment | 12% of the basic salary | Rs 500 a year |
| Maximum investment | No capping on the investment made through VPF, but the employer’s contribution will remain the same | Rs 1,50,000 a year |
| Current rate of interest | 8.50% p.a. | 7.10% p.a. |
| Lock-in period | Till retirement | 15 years |
| Tax Benefits | Deduction allowed on contribution. Maturity amount tax free but only after 5 years. | Deduction u/s 80C for contributions. Maturity amount is tax free. |
| Regulating Act | Employees Provident Fund And Miscellaneous Provisions Act, 1952. | Government Savings Banks Act, 1873 (earlier Public Provident Fund Act, 1968) |
| Scheme offered by | Employee Provident Fund Organization (EPFO) | Select public sector banks and Post Office |
Liquidity of EPF vs PPF
EPF: You can withdraw 75% of your EPF campus if you are unemployed for 1 month and total corpus if you are unemployed for 2 months. In such cases, you can also let the money stay in the account but you'll stop earning interest on it after 3 months and all withdrawals will be taxable.
PPF: You cannot withdraw money due to unemployment and there is a lock-in period of 15 years. Partial withdrawals are generally allowed from the 7th year onwards, but check your bank's website for the withdrawal caps and other conditions.
The better option of PF vs PPF
Both EPF and PPF come with their set of pros and cons. One significant benefit of EPF is that it is transferable across employers and partial withdrawals are available on certain conditions. With EPF, you don’t have to go through the hassle of depositing the money from your savings account as it is deducted directly from the salary.
One drawback of EPF is that the contribution is compulsory every month. On the other hand, PPF offers a much-needed relief as you can contribute whenever you can. However, the lock-in period of 15 years might sometimes seem too long. You can avail loan against the balance in your PPF account. The maturity proceeds received from both EPF and PPF accounts are tax-free.
Conclusion
Both PPF and EPF are government schemes. They are tax-saving options covered under Section 80C of the Income Tax Act, 1961. The sovereign guarantee backs both the schemes and individuals can choose the one that seems suitable for them.