EPF Vs PPF: Where Should You Invest Your Money?

Employee Provident Fund (EPF) and Public Provident Fund (PPF) are two long-term investment instruments that help in saving on income tax. The beauty of these instruments lies in their slow, steady and secure nature. It is very important for working individuals to take advantage of these options, as small investments over a period of time result in a big corpus by retirement time. But people often get confused between the two and may need help in deciding clearly which of these is suited best for them. Let's take a closer look to understand the potential benefits of the two options.

What is PPF?
A statutory scheme by the central government, it was introduced in India in 1968 with an aim to mobilise small savings and provide old-age income security to self-employed individuals from unorganised sectors. It offers an attractive rate of interest and returns on the amount invested.

What is EPF?
It is a retirement benefit scheme for salaried employees. In it, both the employee and the employer contribute 12 per cent of the basic salary every month to the Employee Provident Fund Organisation (EPFO). This percentage is pre-set by the government. And the withdrawal of EPF amount after five years of continuous service is exempt from tax. Individuals can also transfer their EPF account from one company to another when they switch jobs.

What are the factors that distinguish PPF from EPF?
Return on investment
The current rate of return for an EPF account is 8.5 per cent annually, while it is 7.1 per cent per annum for PPF.

Investment tenure
PPF comes with a lock-in period of 15 years, meaning the amount deposited can be withdrawn on maturity after 15 years. If an investor wants to continue with the scheme without withdrawing the money just then, he/she can extend the period in batches of five years for an unlimited number of times.

The amount deposited in an EPF account can be withdrawn at the time of retirement or if the individual has resigned from the job and wants to use the money.

Loan option
Both the instruments allow investors to avail the loan facility, with conditions. EPF account holders can avail loans for personal needs against their deposits by submitting required documents and meeting other criteria specified by the EPFO. For PPF, a loan facility is available from the third to the sixth financial year.

Tax implications
PPF comes under the Exempt-Exempt-Exempt (EEE) category, meaning the principal and maturity amount, as well as the interest amount, is tax-free under PPF.

According to new tax rules, if deposits to EPF and Voluntary Provident Fund (VPF) by an employee exceed Rs 2.5 lakh in a financial year, then the interest earned on the amount exceeding Rs 2.5 lakh will be taxed for the employee.

Depending on the above factors, EPF appears to be slightly more beneficial to a contributor because of the following reasons:

• EPF has contributions from the employer but they are not available in the PPF scheme.
• An EPF holder can withdraw money for personal needs after a much shorter time limit, while a person cannot do so in PPF until the completion of the 15-year lock-in period.