What is PF?? PF is a popular name for EPF or Employees’ Provident Fund.It is a saving scheme for the employees of the organized sector, established by the government. The EPF interest rate is declared by the EPFO every year. EPFO(Employment Provident Fund Organization) is a statutory body under the Employees’ Provident Fund Act, 1956. Currently the interest rate is 8.55%. Only the Employees of companies registered under the EPF Act, can invest in the PF or EPF. Both the employer and the employee are required to contribute 12% of the employee’s basic salary and dearness allowance every month to the EPF account.
PF or Public Provident Fund: It is a government supported savings scheme. It is open to everyone-employed, self employed, unemployed or even retired. The PF account is not mandatory and anyone can contribute any amount to the PPF subject to 500 Rs. and maximum of Rs. 1.5 Lakh per year. The current PPF interest rate is 8%. The PPF interest rate is reviewed every quarter. You can open a PPF account with most of the major banks and even with the post office.
EPF Vs PPF:Eligibility, Tenure, Limits, Interest rate, Tax benefits:
|Investment Amount||Minimum Rs. 500 and Maximum Rs. 1.5 Lakh||Compulsarily 12% of the salary,DA. It can be increased voluntarily.|
|Eligibility to invest||Any Indian except for an NRI. Includes Students, Self employed, employee or retired persons.||Only salaried employee of company registered under EPF Act.|
|Tenure||15 years, extendable after that for a block of 5 years indefinitely.||Can be closed while quitting job permanently. Can be transferred while changing companies till retirement.|
|Rate of interest||8.0%||8.55%|
|Tax Benefit||Contribution is tax deductible under sec 80C. Maturity amount is also tax free.||Contribution is tax deductible. Maturity amount is tax free only on completion of 5 years.|
|Governing act||Government Savings Banks Act, 1873 (earlier Public Provident Fund Act, 1968)||Employees Provident Fund and Miscellaneous Provisions Act, 1952|
|Contributor to Fund||Self or parent in case of minor||Both Employer and the Employee|
Safety: Both are safe due to statutory backing but still EPF is more risky due to equity exposure in it.
Both the EPF and PPF are government backed saving instruments. The EPF is managed by statutory body known as the EPFO while the PPF is managed by the Government directly. Every year, 15 % of the fresh money collected by the EPFO is invested in equities. The rest of the money is invested in Government bonds. The EPFO declares the EPF rate annually based on the return of the EPF corpus. The current EPF rate is 8.55% while the current PPF rate is 8%. Historically as well, the EPF rate has been slightly higher than the PPF rate. However the equity exposure in the EPF makes it vulnerable to market movements. A collapse in the market may make it difficult for the EPFO to maintain the EPF interest rate.
The return of PPF are fixed and guaranteed by the government. The exact rate is set every quarter. Historically, the rates have fluctuated around 8%. The interest rate for january-March 2019 is 8%. It was 8% for october- December 2018 too. Here is a brief history of PPF rates:
PPF rates for the past 10 years
|April 2015- March 2016||8.7%|
|April 2014-March 2015||8.7%|
|April 2013- March 2014||8.7%|
|April 2012- March 2013||8.8%|
|December 2011-March 2012*||8.6%|
|April 2011- December 2011||8.0%|
|April 2010-March 2011||8.0%|
|April 2009- March 2010||8.0%|
|April 2008- March 2009||8.0%|
Source: National Savings Institute
LIQUIDITY: EPF is more liquid. Withdrawals from PPF only allowed after the expiry of 5 years from account opening.
EPF:One can withdraw 75% of your EPF corpus if you are unemployed for a period of one month. One can withdraw the entire EPF corpus, if your unemployment extends up to two months. However note that if you withdraw your entire EPF corpus within 5 years of account opening,the withdrawal will be taxable. You can also simply leave the money in your EPF account even if you become unemployed or take up self employment or work in the organized sector. In this case EPF balance will continue to gain interest but will be taxable as well. After three years account will stop earning interest.
The retirement age of EPF is 58. Upon attaining this age you can withdraw most of your corpus. However a portion of the EPF corpus which is used for Employees’ Pension Scheme (EPS) will be paid to you as a pension and same will be taxable.
You can also make partial withdrawals from the EPF. However, you have to specify the reason for the withdrawal and cannot use the funds for any other purpose.You don’t have to return the withdrawal amount. These partial are called as loans against EPF in common parlance.However the facility actually offered is partial withdrawal. There are different grounds for partial withdrawal and even the time period for each ground is different.
PPF: In case of PPF, you cannot withdraw money due to unemployment. PPF account has a term of 15 years. You can make partial withdrawals from PPF after the expiry of 5 years from the year of account opening but you do not have to give any reason for the same. However, the partial withdrawal is capped. The maximum amount that can be withdrawn as per financial year is:
- 50% of the account balance as at the end of the financial year, preceding the current year or
- 50% of the account balance as at the end of the 4th financial year, preceding the current year.
One can also get a loan against the balance in the PPF account from 3rd to the 6th year after opening of an account. The maximum amount of loan that can be availed against PPF account is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for.
EPF withdrawal becomes taxable if withdrawn before 5 years of completed service. PPf withdrawal is not taxable.
Investment in the EPF qualifies for tax deduction under section 80 C of the Income tax Act up to Rs. 1.5 lakh per annum. This applies to both the employer and the employee contribution. Interest on EPF is also exempt from the tax unless you become unemployed. Withdrawals from the EPF are also free from tax unless you make them within 5 years of opening the EPF account. If the withdrawal amount within 5 years from the date of opening the EPF account is 50,000, TDS is deducted from the same.
Investment in the PPF account up to Rs. 1.5 lakh per annum gets u a tax deduction under section 80C of the Income Tax Act, 1961. The interest on the PPF is also exempt from the tax but must be declared in the annual income tax return. The PPF maturity amount is also exempt from the tax. In other words PPF enjoys “exempt,exempt,exempt”tax treatment.
Drawbacks of EPF:
- The EPF contribution is rigid and fixed at 12% of salary and DA from the employer and the employee. You cannot contribute less than this amount, although you can contribute more under VPF (Voluntary Provident Fund)
- EPF is only open to employees of companies which have registered under the EPF Act. This means companies with 20 workers or more. It is not available to self employed or retired individuals.
- Withdrawals before 5 years from account opening of EPF is taxable. In the modern economy, many people cannot keep a job in an EPF registered company for 5 years.
- The EPF rate may not match the long term returns of mutual funds or National Pension System (NPS)
- If you move your jobs from larger to smaller companies or become self employed, You cannot contribute to the EPF. In such case, EPF will stop earning interest after 3 years from your exit from EPF registered employer. Your money will lie idle in the EPF account.
Drawbacks of PPF:
- PPF does not allow partial withdraws before expiry of five years after the year of account opening. You cannot withdraw from the PPF before this period even if you are unemployed or need some money for a family emergency. The tenure of the PPF for 15 years is also very long.
- PPF historically has a lower rate of interest than EPF.
- The PPF rate is fixed and over the long run can give much lower returns than equity linked instruments like mutual funds and NPS (National Pension System)