Employee Provident Fund (EPF) and Public Provident Fund (PPF) are long term investment instruments for retirement. The beauty of these options lie in their slow, steady and secure nature. You keep investing a small amount and end up with a big corpus by the time you retire. It is very important for every working individual to take advantage of these instruments. However a lot of people are confused between these two. We clarify all your doubts.
Public Provident Fund (PPF)
PPF is a statutory scheme of the central government started with the objective of providing old age income security to the unorganized sector workers and self employed persons
Employee Provident Fund (EPF)
Employee Provident Fund (EPF) is a retirement benefit applicable only for salaried employees. It is a fund to which an employee and employer contributes 12% every month (Pre-set by the Government of India) of the employee’s basic salary. Every year, the employer deposits with the Employee Provident Fund Organization (EPFO), the contribution from the employer and the employee. Knowingly or unknowingly, 24% of your basic salary is saved every month. Amount accumulated in the EPF account can be withdrawn to the employee at the time of retirement or resignation. This can also be transferred from one company to the other if one switches jobs.
Return on Investment
EPF: 8.5% per annum (For the year, 2010-2011, EPF is at 9.5%)
PPF: 8 % Per annum
Investment Tenure
EPF: Amount is paid at the time of retirement or resignation whichever is earlier. It can be transferred to one company to other in case of a job change
PPF: Amount can be withdrawn on maturity i.e. after 15 years. It can be extended for a period of 5 Years
Loan Option
EPF: Can make withdrawals for personal needs by disclosing suitable documents
PPF: Can avail loans up to 50% of balance of the 4th year from 6th year onwards
Tax Implication
EPF: Investment qualifies for deduction under Section 80C.Withdrawal of EPF amount is subject to tax if withdrawal within 5 years of employment with the same employer. If you have not worked for at least five years with the same employer but the EPF has been transferred to the new employer, it is not taxed
PPF: Investment qualifies U/s 80C. On maturity amount, there is no tax
Which is better?
EPF has an edge over PPF because of the following reasons
Employer contribution
Employer contributes to the Employee Provident whereas in case of public provident fund no such contribution happens
Return on Investment
Rate of interest on EPF is higher than interest on PPF
Liquidity
An individual having EPF can withdraw amount for personal needs anytime providing necessary documents while an individual holding PPF cannot withdraw money till the completion of tenure
Conclusion:
Though both the investment options has got their own pros and cons, from above we can observe that EPF has got edge over PPF in terms of Return on investment, Employer Contribution, Liquidity. For salaried people who have the option of contributing in EPF schemes, make sure you make the contribution to the fullest extent. Since EPF is not available to self-employed and employees in un-organized sector, PPF is a good alternative.
The author Sridhar Nag is a CFP certified financial planner
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