Thursday, 23 February 2017

Employee Provident Fund (EPF) vs Public Provident Fund (PPF): Differences

EPF is nothing but the Employee Provident Fund and PPF is Public Provident fund. EPF and PPF are both long term savings instruments and both intend to provide income security in retirement days. 


EPF vs PPF: Differences

EPF: is for the salaried people of the private sector and PPF is for self employed and workers of the unorganized sector. Any resident Indian can open a PPF account, even minors can open a PPF account. It is compulsory for private sector employees who earn less than or equal to 15,000 rupees as the basic and DA to contribute towards the Employee Provident Fund. And it is voluntary for people who earn more than 15,000 rupees as their basic and DA to be a part of EPF honor. When you are a part of EPF you need to contribute 12% of your basic and DA. In EPF employer also makes an equal contribution were 3.67% out of the 12% of the employer contribution goes into EPF account, whereas 8.33% goes into Employee Pension Scheme. In case you wish to contribute more than 12% of your basic and DA into your EPF account. It is not compulsory for the employer to contribute over and above 12% of what he is already contributing. 

PPF: In case of PPF, the minimum contribution is 500 rupees each year and a maximum contribution of 1.5 lakh rupees can be made. As per as the taxation goes in case of EPF, the employer contribution is tax exempted and the employee contribution can be claimed for tax reduction under the overall limit of the section 80C which is 1.5 lakh rupees. In case of PPF whatever contributions you make can be claimed for tax reduction under the limit of the section 80C, which is again 1.5 lakhs. 

The Government of India decides the interest rates to pay over EPF and PPF accounts. Currently the EPF rate is 8.75%, whereas the PPF rate is 8%. The Indian Government decides the PPF interest rates based upon the prevalent economic conditions. It is usually in line with inflation on 0.25 or 0.5 higher than the rates of 10 year government bonds.


EPF: Employee Provident Fund Organisation, which is a government body handles the EPF. It invests the EPF into government deposits, gilts, corporate deposits, etc. and based upon its profit, excluding expenses of the previous year, it decides the interest rates of the next year. If you withdraw your EPF funds within 5 years of enrollment, a TDS of 10% is levied on the funds withdrawn, in case your PAN card is registered. If your PAN is not registered your fund would be taxed at 30%. There is no tax on withdrawals after completion of five years. You can withdraw your EPF funds in case you lose your job and you stay unemployed for two months. 

This EPF benefit is highly misused when people switch jobs, they pull out the EPF funds. But ideally you should transfer your EPF funds from one employer to another when you switch jobs. Thus the universal account number that is registered with the EPFO and this is unique to every subscriber and enables transfer of the EPF account. EPF withdrawals can be made for marriage of self, siblings or children, for construction of house or buying a plot and repaying home loan etc. EPF account matures when you turn 58 years old.

PPF: A PPF account matures after 15 years and can be extended by 5 years as required. There are two things that are possible with a PPF account, first one is loaned from the third financial year to the sixth financial year. Either the loan amount can be up to 25 percentage of the total amount in your account in the second year ending, the year before your loan was applied. For example, if the loan was applied in the financial year 2016-1017, up to 25 percentage of the account balance at the end of the financial year 2014-2015 can be applied for. You would have to repay the loan within 36 months and the interest rate that would be charged would be 2% higher than what the subscribers receives over his PPF. From seventh year onward you cannot take any loan, but you can make withdrawals.

 Withdrawal is subject to a maximum of 50% of the account balance at the end of the fourth preceding year in which the loan was applied for or 50% of the account balance of the immediate preceding year in which the loan was applied for. As per the new rules, PPF account can be prematurely closed after completion of 5 years, if the account holder wants to go for higher studies or if PPF funds are required for critical illnesses. It has the complete EEE status that is the investment, the interest occurred and the withdrawal is completely tax free except on the condition where you withdraw before completion of 5 years since enrollment. Whereas PPF has complete EEE status.