Provident funds: 9 important points you should know

Retirement planning is a crucial element of planning in our working life. The comfort of one’s golden time depends a lot on how smartly one manages his/her retirement benefits during working life. There are multiple retirement planning instruments in the market which offer different rates of interest. Among them both types of provident fund are most appropriate wince they offer high rate of interest. Public provident fund (PPF) and Employee provident fund (EPF) are two best ways of parking hard earned money for the future.

There are some basic differences between PPF and EPF, i.e. interest rate, eligibility criteria, tenure, withdrawal procedure and many more.

Money9 gives you a nine-point comparison between the two.

Eligibility

PPF and EPF are completely two different investment options though both deal with pension funds. While anyone can open a PPF account, only salaried persons are eligible for EPF.

A self-employed or businessman or a housewife cannot open an EPF account, but they can open a PPF account. On the other hand, VPF or voluntary provident fund is also for salaried people, who have an EPF account. Both have long lock-in periods barring instances of emergency requirement of money.

Interest rate

The annual interest in PPF is 7.1% and that in EPF is 8.5% at present. But these rates are reviewed once every quarter and year, respectively. But these are still relatively high in a climate of declining interest rates. EPF has the highest interest rate among all government savings instruments.

PPF account can be opened at a post office or a bank. On the other hand, EPF account is opened by an employer. None can, on his own, open an EPF account.

Tenure

The default tenure of a PPF account is 15 years. After that one can extend it to each 5-year slabs as long as he/she wishes.

On the other hand, the duration of EPF account is same as the duration of your employment. But often people close the EPF account while changing the job and open another account. But this is not a good practice that is why EPFO has now allotted Universal Account Number or UAN which remains same throughout the whole life of a person.

Withdrawal

In case of PPF, you cannot withdraw money due to unemployment. PPF accounts have a term of 15 years. You can make partial withdrawals from PPF after the expiry of six years, but you do not have to give any reason for the same.

You can withdraw 75% of your EPF corpus if you have been unemployed for a period of one month. If your unemployment extends to two months, you can withdraw the entire EPF corpus.

However, if you withdraw your EPF corpus within 5 years of account opening, the withdrawal will be taxable. The EPF retirement age is 58. Upon attaining this age, you can withdraw most of your corpus.

Investment amount

In PPF, an individual can invest between Rs 500 and Rs 1.5 lakh in a fiscal year. One can deposit more than Rs 1.5 lakh, but no tax benefit, or interest benefit, would be applicable on the excess amount. In PPF one can deposit money maximum 12 times.

On the other hand, the contribution of EPF account is 12% of the basic salary. This is the contribution of the employee. The employer also contributes the same amount. An employee can contribute more than his/her stipulated 12% of the basic salary. That amount would go to VPF, which carries the same facility as EPF and attracts the same interest rate.

Tax benefit

PPF is fully tax-free. The contribution, interest and earning all are tax-deductible under section 80C of Income Tax Act, 1961. The maturity amount of PPF is also tax-free. But if the amount deposited in a year is more than Rs 1.5 lakh, then respective tax rate is applicable on the excess amount.

On the other hand, EPF is also tax free under section 80C of IT Act, but if the money is withdrawn before the end of five years from the date of opening of the account, the amount withdrawn will become taxable.

If the EPF contribution along with the VPF becomes more than Rs 2.5 lakh per annum, then the EPF interest earned will be taxable.

Loan facility

Banks can sanction a loan up to 85%-90% of the total corpus in a PPF account. The only condition is that the PPF account has to be active and has run for a minimum of five years. If the account is between three and five years, one can get 25% of the deposit as loan.

Loan against an EPF account is also permissible but for some special cases, like house purchase, children higher study or marriage, treatment for some serious disease etc.

Transfer of account

Both PPF and EPF are dynamic in nature. For the sake of the common people government has made these two instruments the best fit debt investment option which give a high return. A person can transfer his/her PPF account from a post office to banks and vice versa. Similarly, one can transfer the PPF account from one bank branch to another or to other banks as well.

On the other hand, one can transfer his/her EPF account throughout his working life. One should do that by linking that EPF account number with the UAN. It will help the employee to maintain continuity of the EPF account irrespective of how many times he/she changes the job. Otherwise, the person will lose the continuity as well as multiple benefits from EPF.

Limitations

In PPF, no one is allowed to invest more than Rs 1.5 lakh for tax benefit. Beside one person is eligible to open or operate only one PPF account in his/her lifetime. If anybody has more than one account, the second one will not attract any benefits whatsoever.

A person might have multiple EPF accounts, but that is not a very good practice, after the introduction of UAN. Besides multiple EPF accounts don’t give lots of benefits, i.e. tax holiday, loan facility, withdrawal facility etc.

Besides both PPF and EPF account can turn into inoperative if there is no transaction for a period of 12 months and more.