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.
About 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 into 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 accrual of substantial interest on the balance amount. This interest is considerably higher than a general savings account interest rate. In the Financial Year 2019 – 20, the Employees’ Provident Fund Organisation (EPFO) set the interest rate on EPF at 8.5%. In the previous fiscal year, it was 8.65%.
Nevertheless, a few of the features of the Employees’ Provident Fund are discussed below.
- Eligibility Criteria for Employees’ Provident Fund
There is a single criterion for 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 account 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, 8.67% 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 June, July, and August 2020. This rate reduction also applies to employees of PSUs; however, PSU employers need to continue contributing at 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 of 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 completion of 5 years of service, such amount is subject to TDS at the rate 10% provided PAN is produced.
About 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 in April to June quarter of the Financial Year 2020 – 21 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 period by a block of 5 years from thereon.
- Tax implications on PPF
All contribution made in a particular year subject to a maximum of Rs.1.5 lakh is exempt from taxation under Section 80C. Moreover, the interest and matured 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.
|Nature||Retirement-cum savings scheme.||Savings scheme.|
|Eligibility||Employees belonging to an organisation that employs more than 20 individuals.||Every Indian citizen except HUFs and NRIs.|
|Maturity period||Until retirement.||15 years from the date of account opening.|
|Contribution||12% of salary (basic pay + dearness allowance)||Min. contribution – Rs.500; max. contribution – Rs.1.5 lakh.|
|Premature withdrawal||Upon unemployment for more than 2 months; for purchase of construction of a house; medical purposes; the marriage of self or a dependent person; repayment of a loan.||Allowed after completion of the 7th year of account opening.|
While both these schemes instill a habit to save among individuals, they operate through these different rules and regulations that one must be aware of before contributing to them.