Difference Between EPF And PPF

Which is Risky – PPF or EPF?

• Both EPF and PPF are considered as safe due to government backing.  However, EPF is slightly riskier as the funds are exposed to equity investments.
• The EPF is governed by a statutory body called the EPFO. The PPF is managed directly by the government of India.
• 15% of the total money collected by the EPFO each year is invested towards equities. The remaining portion goes in government bonds.
• The EPF rates are announced every year depending on the returns generated from the EPF corpus. The current EPF rate of interest is 8.50% and for PPF, the rate is 7.1%.
• While the EPF interest rate has been higher (8.65%) as compared to PPF rate, the equity exposure of EPF makes it a risky option. A volatile market can have a significant impact on EPFO and maintaining an EPF interest rate could be difficult. PPF returns are fixed and guaranteed. Interest rates on this investment have usually been around 8% per annum.

Which investment offers liquidity?

• EPF offers more liquidity as compared to PPF. PPF withdrawal can only be made after completion of 5 years from the time of account opening.
• EPF allows investors to withdraw 75% from the corpus in case of unemployment for over one month. In case unemployment goes over two months, investors can withdraw the entire EPF corpus. However, if one withdraws from the EPF corpus within 5 years of account opening, the amount withdrawn is taxable.
• If the EPF account is left untouched even in case of unemployment or self-employment or unorganised sector-related work, the EPF balance continues to earn interest. However, the same is taxable. After completion of three years, the account stops earning interest.
• The retirement age for EPF is 58 years. Investors can withdraw the entire corpus after attaining retirement age. However, some of the EPF corpus kept aside for Employees’ Pension Scheme (EPS) is paid to the account holder as pension and this amount is taxable.
• Account-holders can also make partial withdrawals from an EPF account. However, they need to specify the reason for withdrawal. The withdrawn funds cannot be used for any purpose other than the one specified. Once withdrawn, the money does not have to be returned. Such partial withdrawals are called loans against EPF. However, the service offered is partial withdrawal. There are various rules for partial withdrawal from EPF, each with its specific time period.
• In PPF, investors cannot withdraw money for reasons such as unemployment. PPF accounts come with a term of 15 years. Partial withdrawals from PPF are permitted after completion of 6 years and beginning of 5th year from the account opening date. Investors do not have to specify the reason for withdrawal. However, there is a limit on partial withdrawal. It makes sense to check with the respective banks whether a partial withdrawal is permitted. Some banks, like ICICI and Axis, permit partial withdrawals only after 5 years and some banks allow it after completion of 7 years.
• Investors can withdraw a maximum amount as per the following:
  • 50% of the total account balance as of the financial year ending, preceding the current year, or
  • 50% of the total account balance as of the 4th financial year ending, preceding the current year.
• There is also the option of availing a loan against the PPF account balance starting from the 3rd to the 6th year after the opening of an account. The maximum loan that can be availed against PPF accounts is 25% of the total account balance as at the end of the 2nd financial year preceding the year in which the loan application was made.

How is EPF and PPF taxed?

• EPF withdrawal is taxable if the amount is withdrawn before completion of 5 years of service. On the other hand, PPF withdrawal is not taxable.
• EPF investment is eligible for tax deduction under Section 80 C of the Income Tax Act maximum up to Rs 1.5 lakh per annum. Both the employer and employee contribution is considered in this case.
• Interest earned on the EPF balance is also exempt from tax except in case of unemployment.
• EPF withdrawals are also tax-free unless they are made within 5 years of EPF account opening. If the withdrawn amount is more than Rs 50,000 and has been withdrawn within 5 years of account opening, TDS is deducted.
• PPF account investment of up to Rs 1.5 lakh per year is eligible for a tax deduction as per Section 80 C of the Income Tax Act, 1961. The interest earned on PPF account balance is also exempt from tax but it has to be considered in the annual income tax return. PPF maturity amount is also tax-exempt.

What are the limitations of EPF and PPF?

• Partial withdrawals are not allowed in PPF accounts before completion of 5 years after account opening. Withdrawals from PPF accounts are not permitted before this period even in case of unemployment or monetary requirements due to family emergency. PPF tenure of 15 years is also generally considered to be very long.
• PPF has always had a lower interest rate as compared to EPF. PPF interest rate is fixed and in the long run, it can give far lower returns when compared to equity-linked instruments such as mutual funds and NPS (National Pension System)
• EPF is only meant for employees of companies which are registered under the EPF Act. Companies with 20 or more workers fall under this bracket. Self-employed or retired individuals cannot open an EPF account.
• The EPF contribution is fixed at 12% of basic salary and DA. It includes the contribution from the employer and employee. Investors cannot contribute less than the percentage applicable, although contribution beyond the stated percentage is allowed to be made to VPF (Voluntary Provident Fund).
• Any withdrawals made before completion of 5 years of account opening of EPF account are taxable. As the Indian economy continues to move towards a modern variant, many people are unable to keep jobs in an EPF-registered company for 5 years. Hence, the concept of such an investment may not be benefitting many individuals.
• If an individual changes jobs from large to small companies or becomes self-employed, he or she cannot contribute to the EPF account. In such a case, the EPF will not earn any interest after 3 years from the person’s exit from the EPF-registered employer. This results in idle funds in the EPF account.
• The EPF interest rate often does not match the long-term returns offered by investments such as Mutual Funds or National Pension System (NPS).

Conclusion:

PPF and EPF are both government-backed schemes which are very traditional. These are used as tax-saving options that are covered under Section 80C of the Income Tax Act, 1961. The sovereign guarantee makes these schemes attractive and individuals can choose the one that best suits their needs.

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