Difference between EPF and PPF

The Indian government has introduced a handful of savings schemes to promote the practice of saving among Indians. Such schemes also help to inculcate a culture of financial prudence among the general populace. One of these savings schemes is called Provident Fund (PF). In India, there are compulsory savings schemes and voluntary savings schemes. 

Employees’ Provident Fund belongs to the former kind while a Public Provident Fund belongs to the latter type. There are a few points of difference between EPF and PPF. However, before delving into the specifics of their difference, it is crucial to learn about the schemes individually. 

Employees’ Provident Fund

It is a savings-cum retirement scheme designed to create a corpus that works as a financial cushion in times when working individuals stay unemployed. In nature, it is similar to the General Provident Fund, i.e. employees are mandated to contribute towards their EPF account every month from out of their salary. 

This savings scheme applies to employees from all sectors of the economy. Moreover, companies that employ more than 20 individuals are compelled by law to create EPF accounts for their employees. 

The mandate to contribute a portion of one’s income instils a positive financial practice with far-stretched implications for the future. Furthermore, this mandate forms an essential difference between EPF and PPF. 

However, an EPF account is not merely a savings account. It also allows for the accrual of substantial interest on the balance amount. This interest is considerably higher than a general savings account interest rate. In the Financial Year 2022 – 23, the Employees’ Provident Fund Organisation (EPFO) set the interest rate on EPF at 8.15%. 

PPF Vs EPF 

• Eligibility Criteria for Employees’ Provident Fund

There is a single criterion for the Employees’ Provident Fund – the employee must be working in a company that employs more than 20 individuals. However, companies with less than 20 employees can also opt to offer the benefits of EPF accounts to their employees. 

• Contribution to Employees’ Provident Fund

In the case of EPF, both the employer and the employee must contribute to such an individual’s EPF account. It is a critical point in PF vs PPF. 

EPFO has set the compulsory rate of contribution at 12% of an employee’s salary – basic pay plus dearness allowance – for both an employee and an employer. Out of an employer’s 12% contribution, 8.15% is channelled towards Employees Pension Scheme (EPS), and the rest 3.33% is paid to EPF. 

However, under recent circumstances, the Finance Minister has reduced the compulsory rate of contribution for employees and employers in the private sector from 12% to 10%. This reduction is applicable for 2022. This rate reduction also applies to employees of PSUs; however, PSU employers need to continue contributing at a 12% EPF rate. 

Nevertheless, all employers and employees are free to contribute more than the compulsory rate as part of the Voluntary Provident Fund (VPF). Contribution to EPF must continue as long as an individual is employed in a company with more than 20 employees. EPF account-holders can also transfer their EPF balances when changing employers. 

• Maturity Period for EPF

An employee must hold an EPF account until permanent retirement. Moreover, an individual can withdraw from an EPF account only when they are out of employment for more than 2 months. The maturity period is a major difference between PF and PPF. 

• Tax implications on EPF

The contributions made to an EPF account in a year are exempt from taxation under Section 80C of the Income Tax Act, 1961. Individuals must follow the old tax regime to avail this exemption. Moreover, the interest and the amount received on superannuation are exempt from taxation. 

However, if an individual withdraws more than Rs.50,000 from their EPF account before the completion of 5 years of service, such amount is subject to TDS at the rate of 10% provided PAN is produced. 

Public Provident Fund – 

It is an optional savings scheme, as opposed to the Employees’ Provident Fund. Another difference between EPF and PPF is that the latter is open to all Indian citizens residing in the country. However, Indian citizens who opened their PPF accounts while living in the country can continue to operate it even when abroad. 

The balance in a PPF account enjoys a fixed rate of interest throughout its tenure. However, the rate of interest that new accounts enjoy is subject to revision by the Indian government every quarter. The rate of interest for PPF is 7.1%. 

Other features of PPF are enumerated below. 

• Eligibility criteria for Public Provident Fund

The following category of individuals is eligible to open an account under PPF – 

Indian citizens residing in India – employees, self-employed individuals, minors (provided their guardians/parents represent them), and retired persons. 

Hindu Undivided Families (HUFs) and NRIs are not eligible for PPF. However, individuals belonging to a HUF can open a PPF account. Also, NRIs, who opened a PPF account while residing in India are allowed to enjoy PPF benefits. 

• Contribution to Public Provident Fund

Another major difference between EPF and PPF is the contribution. Individuals can make a maximum of 12 contributions in a year to a PPF account. Furthermore, a PPF subscriber needs to deposit a minimum of Rs.500 per year and can deposit a maximum of Rs.1.5 lakh in a year. 

• Maturity Period of PPF

Such contribution shall continue until the maturity of a PPF account, i.e. 15 years. An account-holder can choose to extend such a period by a block of 5 years from thereon. 

• Tax Implications on PPF

All contributions made in a particular year subject to a maximum of Rs.1.5 lakh are exempt from taxation under Section 80C. Moreover, the interest and maturity value are both exempt from taxation in the year of withdrawal. 

Difference Between EPF and PPF

The following table enumerates the critical points in EPF vs PPF. 

While both these schemes instil a habit to save among individuals, they operate through different rules and regulations that one must be aware of before contributing to them. 

Limitations of EPF and PPF

• Partial withdrawals are not permitted in PPF accounts before the completion of 5 years from the date of account opening. Withdrawals from PPF accounts are not permitted prior to this period, even if you are unemployed or have a family emergency. A PPF tenure of 15 years is likewise widely regarded as unusually long.
• PPF has always had a lower interest rate than EPF. PPF interest rates are fixed, and in the long run, they might provide significantly lower returns than equity-linked vehicles such as mutual funds and NPS (National Pension System)
• EPF is only available to employees of enterprises registered under the EPF Act. This category includes businesses with 20 or more employees. Individuals who are self-employed or retired are not eligible to open an EPF account.
• The EPF contribution is set at 12% of the basic income and DA. It includes both the employer’s and the employee’s contributions. Investors cannot contribute less than the applicable percentage.
• Any withdrawals made prior to the completion of 5 years from the date of account opening of an EPF account are taxed. Many workers are unable to hold jobs in an EPF-registered company for 5 years as the Indian economy continues to evolve. As a result, the concept of such an investment may not benefit many people.
• If a person moves jobs from large to small businesses or becomes self-employed, he or she is no longer able to contribute to the EPF account. In such a circumstance, the EPF will cease to collect interest three years after the person’s departure from the EPF-registered employer. As a result, funds in the EPF account sit inactively.