EPF vs PPF: Which one is a better investment option?

Retirement planning is a crucial element of any financial plan. While retirement appears like a far-off occurrence to people in their 20s, it requires meticulous planning and timely investments to build a dependable corpus. The human mind is prone to focus on immediate objectives and obstacles and rarely looks thirty or forty years ahead. However, with growing inflation and longer life expectancy, it is critical to managing your retirement finances. 

There are various products and plans you may invest in for your retirement years. Employee Provident Fund (EPF) and Public Provident Fund (PPF) are two government-backed schemes for retirement planning. These schemes can help you save taxes while reaping the benefits of disciplined investing years later. This article covers the benefits and features of both schemes and helps you determine which is preferable.

Understanding EPF Account 

Any organisation with more than 20 employees is required to register with the Employee Provident Fund Office (EPFO) under the Employee Provident Fund Act of 1952. Every salaried employee is entitled to join the EPF scheme through their employer. Under the scheme, an employee has to pay a certain contribution (12% of the basic wages plus dearness allowance) towards the scheme and an equal contribution is paid by the employer. An employee’s contribution to the EPF account is allowed as a tax deduction up to Rs 1.5 lakh under Section 80C of the IT Act. 

Investing money in EPF goes on until the employee retires or resigns. This scheme gets a predetermined annual rate of return that is reviewed by the government yearly. The current applicable interest rate is 8.15%.

Understanding PPF account

The Public Provident Fund scheme is a government savings plan available to the general public. A PPF account proves to be a useful tool for long-term retirement savings as it has a tenure of 15 years. You can register a PPF account with a bank or post office and begin saving with as little as Rs. 500. If you are a salaried employee, a business owner, an elderly citizen, or jobless, you can create a PPF account. 

The interest rate of the PPF account is regulated quarterly by the government. The current interest rate offered by the PPF account is 7.1% compounded annually. PPF account also offers tax benefits as one can claim income tax deductions up to Rs. 1.5 lakhs u/s 80C of the Income Tax Act, 1961.

The key differences between EPF vs PPF 

While both are government schemes, we have listed below a few differences between EPF and PPF:

1) Investor eligibility

• Only salaried employees are eligible to contribute towards EPF. The enrollment of EPF is taken care of by the employer. 
• PPF is available to everybody, regardless of their employment status. 

2) Investment limit

• Employees are required to contribute 12% of their basic salary to EPF. The employer contributes the same amount as well. 
• In a fiscal year, the lowest investment limit for PPF is Rs 500 and the maximum limit is Rs 1.5 lakh. 

3) Interest rate

• The government determines and declares EPF and PPF interest rates. 
• In terms of interest rates, EPF beats PPF. The current interest rate of PPF is 7.1% per annum, whereas that of EPF is 8.15% per annum. 

4) Tenure

• EPF contributions continue as long as you are employed. When you leave your job, you can close your EPF account. In the event of a job change, you can transfer the EPF account to the new employer. 
• PPF is a fixed-term savings plan. The first term is 15 years, with five-year extensions possible after that. 

5) Tax benefit

• Both EPF and PPF are government-backed plans, and contributions are tax-deductible. 
• Employee contributions to EPF are tax deductible under Section 80C up to a limit of 1.5 lakhs, although EPF maturity proceeds are tax-free only if you withdraw after five years of account opening. Interest earned on contributions up to Rs 2.5 lakh per year is tax-free.

Further, if the employer’s contribution to EPF, National Pension Scheme, and superannuation fund on an aggregate basis exceeds Rs.7.5 lakh in a financial year, the additional amount is taxable in the hands of the employee.

• PPF falls under the Exempt-Exempt-Exempt category. Your PPF contribution is tax deductible under Section 80C, up to a limit of Rs. 1.5 lakhs. Furthermore, the accumulated amount and interest are also exempt from tax at the time of withdrawal. 

PPF vs. EPF: Liquidity 

The simplicity of withdrawal is another point to consider when comparing EPF and PPF. Here’s a breakdown of the liquidity offered by both schemes. 

Premature Withdrawal from a PPF account

• After completing five years from the end of the year in which the initial investment was made, partial withdrawal from the PPF account is permitted. For instance, if you open a PPF account on January 1, 2022. You can withdraw the amount partially from the financial year 2027-28 onwards.
• The maximum withdrawal amount is the lesser of two alternatives: 50% of the PPF balance at the end of the previous fiscal year or 50% of the balance at the end of the fourth fiscal year.
• Each fiscal year, only one partial withdrawal is allowed and the amount withdrawn is not taxed 
• After five years of opening the account, one can opt for the premature closure of the PPF account only under certain circumstances. 

Premature Withdrawal from an EPF account

• If you have been jobless for a month, you can withdraw 75% of your EPF corpus. You can withdraw the whole EPF corpus after two months. If the withdrawal is made within five years of opening the EPF account, the amount withdrawn is taxed 
• EPF withdrawals before five years of continuous service attract TDS. The applicable TDS rate is 10% if the PAN details are furnished and 34.608% In case PAN details are not provided.

However, if the withdrawal amount is less than Rs. 50,000, then no TDS is charged. 

• After 5 years of opening the account, premature PF withdrawals are also allowed in case of financial emergencies such as weddings, higher education, purchase of land/houses, and medical emergencies.

Understanding the underlying risks of EPF and PPF 

Both EPF and PPF are government-backed plans that are safer than other investment alternatives available in the market. Yet, there is a distinction between EPF and PPF in managing corpus.

As the government manages the PPF funds, the return is assured and risk-free. EPFO is a distinct entity established to handle the EPF corpus. EPFO has the power to invest 15% of the new cash gathered each year in equities. While equity ownership has the potential to produce an upside for investors, it also entails the risk of market volatility and principal loss, adding an element of risk to the portfolio.

There is a risk of default if the markets fall and EPFO fails to honour the interest and payment commitments.

Limitations of EPF and PPF

• PPF returns are much lower when compared to other investment alternatives and government schemes. The rates have significantly decreased over the years. Furthermore, PPF investments have a five-year lock-in period and a 15-year tenure. Even in an emergency, total premature withdrawal is not permitted. 
• EPF is only available to salaried employees, and contributions cannot be less than 12% of your basic salary. Contributions to EPF are only permitted while you are working. If you quit your work and start your own business, you can no longer contribute to EPF. Your EPF fund will only receive interest for three years after you leave your job 

Final thoughts

EPF and PPF are both excellent retirement savings plans. Both schemes are secure and relatively risk-free with government backing. While there are substantial differences between EPF and PPF, each with its advantages and disadvantages, both are viable solutions for creating a solid long-term retirement corpus. 

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