Public Provident Fund (PPF) is a government-backed small saving scheme that offers moderate returns and is loaded with tax benefits, tax exemption and security to capital
New Delhi: Retirement planning is one of the most important things and a lot of people are often confused about which investment instrument to choose to accumulate the retirement corpus. Employee Provident Fund (EPF) and Public Provident Fund (PPF) are two long-term investment instruments that are extremely popular.
Aside from offering guaranteed returns, these investment options also help in saving on income tax. The beauty of these instruments lies in their slow, steady and secure nature. Working individuals need to take advantage of these options so as to accumulate a large amount in their retirement kitty. With the power of compounding, even small investments in these vehicles over a period of time result in a big corpus by retirement time.
However, people often get confused between the two and need help in deciding clearly as to which of these is suited best for them. Here is a comparison between the two to help you choose better.
What is PPF?
Public Provident Fund (PPF) is a government-backed small saving scheme that offers moderate returns and is loaded with tax benefits, tax exemption and security to capital. The interest earned as well as the returns are not taxable under the Income Tax. The investments in PPF can be made in a lump sum or in a maximum of 12 installments. The minimum investment allowed is Rs 500 and the maximum is Rs 1.5 lakh for each financial year. The current interest rate is 7.1% p.a and the tenure of the PPF account is 15 years.
What is EPF?
Employees Provident Fund (EPF) is a retirement benefit scheme for salaried employees. Both the employee and the employer contribute 12 per cent of the basic salary every month to the EPF account. This percentage is pre-set by the government.
The Employee Provident Fund Organisation (EPFO) is the social security body responsible for the overall supervision and regulation of provident fund in India. Withdrawal of EPF amount after five years of continuous service is exempt from tax.
PPF vs EPF:
Return on investment:
The current rate of return for an EPF account is 8.5 per cent annually, while it is 7.1 per cent per annum for PPF.
Investment tenure:
PPF comes with a lock-in period of 15 years, meaning the amount deposited can be withdrawn on maturity after 15 years. If an investor wants to continue with the scheme after maturity without withdrawing the money, they can extend the account in batches of five years for an unlimited number of times. The amount deposited in an EPF account can be withdrawn at the time of retirement or if the individual has resigned from the job and wants to use the money.
Loan option:
Both EPF and PPF allow investors to avail loan facility, with conditions. EPF account holders can avail loans for personal needs against their deposits by submitting required documents and meeting other criteria specified by the EPFO. For PPF, a loan facility is available from the third to the sixth financial year.
Tax implications:
PPF comes under the Exempt-Exempt-Exempt (EEE) category, meaning the principal and maturity amount, as well as the interest amount, is tax-free under PPF. According to new income tax rules, if deposits to EPF and Voluntary Provident Fund (VPF) by an employee exceed Rs 2.5 lakh in a financial year, then the interest earned on the amount exceeding Rs 2.5 lakh will be taxed for the employee.
Conclusion:
EPF appears to be slightly more beneficial to a contributor because of the higher rate of return. Also, EPF has contributions from the employer which is not available in the PPF scheme. While PPF has a tax-exempt limit of Rs 1.5 lakh contribution per financial year, EPF has a tax-exempt cap of Rs 2.5 lakh.
An EPF account holder can withdraw money for personal needs after a much shorter time limit, while a person cannot do so in PPF until the completion of the 15-year lock-in period. However, EPF is only available to salaried employees. On the other hand, PPF is available for everyone.
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