Key Difference Between EPF and PPF: Which Is the Better Option For You?

The Government of India has introduced numerous savings schemes for its citizens. The Employee Provident Fund (EPF) and the Public Provident Fund (PPF) are two of them, which offer distinct features. Sometimes people find it confusing to select an investment option between these two. Read this blog to understand the differences between EPF and PPF, and choose which one is the better option for you.

What Is EPF and PPF?

The EPF is a government-backed savings scheme that allows employees of the organised sector to avail retirement benefits. Employees with a monthly basic salary of up to ₹15,000 and organisations with over 20 employees come under the EPF scheme.

In contrast, anyone can use the PPF scheme regardless of employment status. It is a common long-term savings scheme for both salaried and non-salaried individuals. The PPF scheme permits annual contributions starting from ₹100, with a maximum limit of ₹1.5 lakh.

What Are the Key Differences Between EPF and PPF? 

Before opting for any one of these two government-backed savings schemes, you need to understand the key differences between EPF and PPF.

• Contributions

For EPF, employees and employers contribute a total of 12% of the basic salary of employees which is up to ₹15,000. Employers contribute 8.33% to the Employee Pension Scheme (EPS) and 3.67% to EPF. The employees are also mandated to contribute towards the EPF corpus every month from their salary.

On the other hand, an individual can contribute between ₹500 and ₹1.5 lakh yearly for PPF. They can invest both in a lump sum or 12 installments. An individual can open a PPF account investing with only ₹100 per month.

• Interest Rate and Returns

There is a huge difference between EPF and PPF in terms of interest rates. 

Currently, the Employee Provident Fund Organisation (EPFO) has confirmed that the fixed interest rate of EPF is at 8.25%. This interest rate makes EPF a secure choice for the employees to get steady returns.

The current interest rate of PPF is at 7.1%, which is compounded annually. The fixed interest rates of PPF make it a risk-free investment option for every individual in India. Moreover, it enjoys EEE status, meaning that the investment amount, the interest earned and the maturity proceeds are all exempt from taxes.

• Withdrawal

The differences between EPF and PPF can also be found in withdrawal rules. In the case of EPFs, the lock-in period depends on different purposes of withdrawing funds. Employees are allowed to withdraw with their interest or six times his or her monthly salary, whichever is less, for medical treatment.

An employee can withdraw 75% and the entire amount after he or she becomes unemployed after one month and two months, respectively. EPF partial withdrawal can only be used for medical treatments of spouses, children and parents. In addition, there is no lock-in period for this category of withdrawal.

In terms of home loan repayment, members can withdraw up to 90% of their overall corpus, if a house is registered with their name. Employees can withdraw the funds within three years.

Moreover, an employee can withdraw his or her entire EPF corpus, after completing the age of 58 years. Employees are allowed to withdraw a maximum of 90% of their EPF balance.

On the other hand, the lock-in period for PPF is 15 years, but premature withdrawals are also applicable in particular situations like medical emergencies or education expenses. This incurs a 1% penalty on earned interest. After the completion of seven years of contributions, individuals can avail loans up to 50% of the total balance at the end of the 5th year.

They can also choose partial withdrawal from their PPF account if they have been operational for the last 5 years. They can enjoy the benefit of compound interest after withdrawing a portion of the amount.

• Taxation

While discussing the differences between EPF and PPF, It is crucial to consider how they are subjected to taxation. Employees can take advantage of the tax deduction while using EPF, under Section 80C of the Income Tax Act up to ₹1.5 lakh yearly.

This is applicable to both the contributions of the employer and the employee. Additionally, the interest on the EPF also comes under tax exemption unless the employees are out of a job.

Employees do not have to pay tax if they withdraw funds from the EPF, within 5 years of opening the EPF account. If they withdraw more than ₹50,000 within 5 years from the EPF account opening date, TDS will be deducted from the same.

In contrast, if you invest in the PPF account up to ₹1.5 lakh per annum, you will get a tax deduction under Section 80C of the Income Tax Act, 1961. The interest receivable from the PPF is also exempt from tax if it is declared in the annual income tax return.

While investing in PPF, you can also avail the benefit of tax exemption from the maturity amount since the PPF comes under EEE tax treatment.

Which Is Better: EPF or PPF?

Both EPF and PPF have distinct features. Following your individual needs can make you choose any one of these two options. You will earn an interest rate of 8.25% while investing in EPF, whereas you can get a 7.1% interest rate in PPF.

You can withdraw funds from both EPF and PPF before the maturity period in specific circumstances. Employees can withdraw up to 90% of their accumulated EPF balance for home loan repayment after completing three years of contributions to their account. In addition, they can partially withdraw six times their monthly salary for medical purposes.

On the other hand, you can also withdraw 50% of the PPF funds before the maturity period only after four years of contributing to PPF. It is important to choose any one investment option as per your needs by following these differences between EPF and PPF.

Final Word

Although they offer numerous benefits, there are numerous differences between EPF and PPF. For instance, employees and employers equally contribute a total of 12% of the employee’s basic salary to EPF. On the other hand, an individual can contribute a minimum of ₹500 and a maximum of ₹1.5 lakh in each financial year for PPF.

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