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PPF Vs EPF
There are a lot of Indians who just know EPF and PPF scheme are safe investment options and they would get close to 8% returns each year. But there are a lot of differences between Employee Provident Fund (EPF) and Public Provident Fund (PPF), although they look quite identical in nature. Let’s figure out what is the difference between PPF and EPF (fixed interest rate instruments)
What is EPF (Employee Provident Fund)
- This scheme provides retirement benefit and is available to all salaried individuals as it involves compulsory savings by the employees on monthly basis
- There is a deduction of 12% of the basic salary every month from an employee`s salary and corresponding to this amount, there is a contribution of 12% from an employer every month. The combined amount is invested to earn a specified interest rate. The money thus, accumulated is given to an employee at the time of retirement or at the time of leaving of service permanently.
- An individual also has the option not to avail the EPF option wherein there would be no deductions from his salary each month and he would get all the money in hand i.e bank account subject to his monthly basic salary should be more than Rs 6500. This is also possible only when the employee has not availed any service of EPF account in his life time and has to opt for this option before joining his first job
- You can also appoint a nominee for your EPF account and you can also change the nomination details by obtaining Form 2
What is PPF Scheme (Public Provident Fund)
- This fund is different from Employee Provident Fund mentioned above in a way that there is no employer involved in making the contributions
- Freelancer, self employed, consultant or any individual who does not have a salaried account can voluntarily open PPF account. This PPF scheme was established by Central Government
- The PPF account can be opened in designated post office branches, nationalized banks and branches of State Bank of India (SBI) or ICICI Bank or other banks
- You can invest a minimum of Rs 500 to PPF account opened at your bank that may be SBI PPF account or ICICI Bank and the maximum limit of investing is Rs 1,00,000 per year
- You can invest in 12 monthly instalments or you can choose to invest lump sum in PPF scheme
- The tenure of the PPF account is 15 years and after that you can increase its tenure in the block of 5 years
Difference between PPF and EPF
1) Tax implications
EPF – The amount invested in Employees Provident Fund qualifies for rebate under Section 80C with a maximum exemption limit of Rs.100000 like any other instrument qualifying under Section 80C. PF becomes taxable for an individual who has not worked for a period of five years. In case an individual has not worked for 5 years and PF is transferred to a new employer, then also it is not taxable
PPF – The complete investment amount in a financial year upto a maximum limit of Rs.100000 is available for deduction under Section 80C. Also on maturity there is no tax implication and maturity amount is tax free. You are also eligible to claim tax deduction in case you contribute towards PPF account of your husband/wife/son subject to a maximum limit of Rs 1,00,000 again.
2) Rate of Return
- PPF interest rate is 8.8 % for this financial year 2012-2013
- EPF interest rate is 8.6% for this financial year 2012-2013
3) Loan on PF/PPF
EPF: Loan on PF is available in case of Provident Fund. The person needs to provide suitable documents to get a loan approved and depending on the balance available in PF account, loan gets sanctioned. The interest amount has to be repaid in maximum two instalments once you repaid your entire loan
PPF: A person can avail a loan on PPF account from the third year of opening to sixth year. The maximum loan amount permissible is 25% of balance in the account at the end of second year immediately prior to the year in which the loan is applied for. It effectively means if you are applying for a loan in the third year, you can get a loan of maximum of 25% of the balance of the first year. Such PPF withdrawal has to be repaid within 2 years and the rate of interest would be 2% higher than the prevailing rate of interest on PPF
Example: If a PPF account is opened in the year 2003-2004 and the balance at the end of year is Rs 10,000 then the first loan of Rs.2500 will be available during the year 2005-2006
4) Premature Withdrawals
EPF: Premature withdrawal of money is allowed by filling up PF withdrawal form for the purpose of marriage, education, medical treatment or purchase of house or repayment of home loan for the home which is self occupied or is in the name of the spouse. The person needs to get in touch with his employer and the EPF office and obtain an EPF withdrawal form.
PPF: Provident fund Withdrawal is permitted from the sixth year onwards and account holders are allowed to withdraw 50 percent of the balance available at the end of 4th year preceding the year in which amount has been withdrawn. For PPF withdrawal, you need to get Provident Fund withdrawal form
5) Tenure
EPF: The tenure for Provident fund or EPF is till the retirement as the money accumulated is given to an employee at the time of retirement. This money is also given to an employee in case of resignation or voluntary retirement. The money accumulated can also be transferred to another company if one changes his job.
PPF: The money accumulated is given at the end of 15 years from the time of opening the account. It can also be extended for a period of 5 years after that.
6) Maximum amount Deposit
EPF: In case of organizations covered under EPF, 12% amount is deducted from an employee`s salary towards the fund and an equal contribution is made by an employer.In case of recognized funds only 12% amount is permissible to be deducted from employee`s salary and deduction after that is taxable.
PPF: Unlike any other tax saving instrument, max deposit limit is 100000 in one financial year and a minimum of Rs 500 per year
7) Liquidity
EPF: An individual can withdraw the amount anytime by showing necessary documents.
PPF: An individual cannot withdraw the amount completely until the tenure of 15 years is over.
Conclusion
Both the funds Public Provident Fund and Employee Provident Fund provide tax deduction under Section 80C. Given a choice between the two EPF scores over PPF scheme in regards to liquidity and employer contribution as there is no contribution from an employer in case of PPF account. PPF interest rate is a notch higher though. For self employed and individuals working in un-organized sectors, PPF scheme is a good alternate by opening a SBI PPF account generating a corpus for retirement.
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