EPF or PPF - Where to invest?

The Employees’ Provident (EPF) is also commonly referred to as the PF. It is a savings scheme that has been established by the government for employees in the organized sector.

The Employees Provident Fund Organisation (EPFO) declares the EPF interest rate every year. It is a statutory body that comes under the Employees’ Provident Fund Act, 1956. 

In 2020, the EPF account interest rate was 8.5% annually. Only companies that are registered under the EPF Act can allow their employees to invest in PF or EPF. 

Both the employee and employer contribute 12 percent of the employee’s dearness allowance and basic salary to the EPF account every month.

What is PPF?

PPF, short for Public Provident Fund, is a savings scheme that is offered by the government. It is a popular tax-saving instrument that comes under section 80C. 

The objective behind PPF is to serve individuals across all sectors. Even blue-collar job holders can invest and save small amounts.

A PPF account delivers higher returns than a savings account. How? PPF accounts are locked in for a period of 15 years. 

In a year, you can invest up to Rs. 1,50,000. A minimum investment of Rs.500 is mandatory every year. 

The complete Rs. 1,50,000 qualifies as tax deductions annually.

What is the difference between PPF and PF?

ParameterPPFEPF
Investment eligibilityEmployees enjoying salaries with reputed organizationsAll individuals, including those with informal jobs
Who contributes?SelfEmployer and employee
What is the minimum investment?Rs.500/year12% of basic salary
What is the maximum investment?Rs.1,50,000/yearEmployer contribution capped @ 12%; employees can contribute as much as they want
Lock-in period15 yearsTill retirement

What are the disadvantages of PPF?

You cannot withdraw the amount partially from PPF 5 years from the year you opened the account. This is applicable even in the case of emergencies or if you are unemployed.

The time duration for PPF is 15 years – a considerable span that extends beyond a single generation.

Traditionally, EPF always had a higher rate of interest than PPF.

The rate for PPF is fixed. This means that instruments such as the National Pension System (NPS) or mutual funds will deliver higher returns since they are equity-linked.

What are the disadvantages of EPF?

Only employees of organizations that come under the EPF Act can avail EPF benefits. 

Organizations that have 20 or more employees are eligible under the EPF Act. Retired or self-employed individuals cannot avail EPF.

The EPF contribution is fixed. It is 12 percent of the DA and Salary from the employee and employer. The amount cannot be less than this.

Employees, can, however, contribute more through the Voluntary Provident Fund (VPF). 

In case of PF withdrawal from EPF before 5 years, the amount is taxable. 

Imagine you have shifted base from an EPF registered company to a non-registered one. Or, you’ve become self-employed. 

If either of the aforementioned scenarios come to pass, you cannot contribute to your EPF anymore. 

What’s worse, after 3 years, your account will stop accruing interest.

The NPS (National Pension System) or Mutual Funds will always deliver higher long-term returns than EPF.

How does taxation work for the 2 instruments?

If you withdraw your EPF within 5 years from the start date, it becomes taxable. PF withdrawal from PPF is not taxable.

If you invest in the EPF, you qualify for tax deduction under Section 80 C of the Income Tax Act. Up to Rs.1.5 lakh is exempted annually.

Both employee and employer contributions are included in this exemption. Unless you’re unemployed, interest on EPF is also exempted.

If you withdraw more than Rs.50,000 within 5 years from your EPF account, TDS will be deducted.

The Income Tax Act of 1961 allows up to Rs.1.5 lakh investment per annum in PPF to be tax-deductible under Section 80C.

If you declare the interest that you earn on your PPF in your annual returns, it is also tax exempted.

Furthermore, even the PPF maturity amount is exempted from tax.

Which is the better instrument to invest in?

Simply put, EPF is a better option than PPF. This is because the employer also contributes to the EPF account. 

No such provisions exist for PPF.

Secondly, to meet personal contingencies and emergencies, you can withdraw your EPF amount anytime. 

With PPF, you can only withdraw the funds upon maturity. 

Third, EPF delivers a higher interest rate than PPF.

Fourth, you can transfer EPF from one employer to another. 

Fifth, under certain conditions, you can withdraw the amount partially. 

Sixth, EPF is deducted directly from the salary. This means that you do not have to take additional steps to deposit the amount from your savings account every month.

All said and done, it is up to you which instrument you choose to invest in. We hope that the aforementioned pointers will help you make informed decisions.

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