What is PF and PPF?

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In the previous chapter, you got to see the process of calculating how much you need to retire comfortably. Given that the amount you need to have at the start of your retirement can be quite huge, it’s essential to pick the right investment choices. And when it comes to saving up for retirement, PF and PPF feature at the top of the list for many Indian investors. These two can be quite easy to interchange - after all, they’re both different kinds of provident funds only, aren't they? 

But if you peel off the common surface and delve a little deeper, you’ll want some important questions answered.

What is PF and what is PPF?

What is a PPF account?

And what is the difference between PF and PPF?

These are some of the things we’ll discuss in this chapter. Let’s get started.

What is a provident fund

Employee Provident Fund, also referred to as just PF or provident fund, is basically an investment scheme that has been developed by the government of India to help employees in the organised sector save up for their future. The primary goal of EPF is to ensure that salaried employees have a significant sum of money to fall back on during their retired life.

Here are the salient features of the EPF scheme.

  • Any company with 20 or more employees must comply with the EPF rules made by the government.
  • According to this scheme, both the employee as well as the employer contribute to the former’s EPF account.
  • Generally, 12% of the monthly salary goes towards the EPF contribution. This deduction happens automatically and compulsorily.
  • The amount deposited in the EPF account earns interest at a rate that’s generally higher than the rate of interest offered on savings bank accounts.
  • Currently, the rate of interest on EPF contributions is 8.5% per annum.

Who is eligible to open an EPF account?

Any employee who works in a company that employs more than 20 people must mandatorily have an EPF account. However, companies with fewer than 20 employees can also open EPF accounts for their workforce.

EPF: An example

Subash (yes, the same one who’s on an inspiring journey of personal finance) works in a multinational company, with a branch in India. Naturally, the number of employees here was way higher than 20. So, his employer opened an EPF account for him early on in his career. For nearly 5 years now, Subash has been contributing to the EPF account. And he’ll continue to do so until he retires. What a neat little arrangement, isn’t it? 

Okay then, what is PPF?

PPF (or Public Provident Fund) is also a scheme that’s backed by the government of India. And like the EPF scheme, PPF is also a retirement-focused investment option. Anybody can invest in PPF – salaried or self-employed. PPF also offers a fixed rate of interest on the amount invested. 

Here are the salient features of the PPF scheme.

  • PPF also offers a higher rate of interest than the average savings bank account scheme. 
  • Currently, the rate of interest on PPF balances is 7.1% per annum. 
  • PPF accounts have a lock-in period of 15 years.
  • The minimum amount an investor should contribute each year is Rs. 500. This is mandatory, so the account can remain active.
  • The maximum amount an investor can contribute each year is Rs. 1,50,000.
  • Taxpayers can claim up to Rs. 1,50,000 each year as a deduction from their total income, as per section 80C of the Income Tax Act. 

What is a PPF account?

A PPF account is an account that helps you invest in the PPF scheme. You can open this kind of an account with a bank or a post office. To activate your PPF account, you’ll need to submit certain documents such as your identity proof, your address proof, a passport size photograph and other KYC documents. 

Who is eligible to open a PPF account?

Any Indian citizen, whether employed as a salaried person or self-employed, can open a PPF account. Even individuals working in informal jobs can invest in PPF. 

PPF: An example

Subash is a salaried employee, as we saw earlier. But he also wants to save more for his retirement. And he wants to enjoy tax benefits in the process. So, he also opens a PPF account (in addition to the EPF account he has). And each financial year, he contributes some amount to the PPF account. This amount earns him a steady interest. And, he can claim the amount invested as a deduction from his total income under section 80C of the Income Tax Act.

What is the difference between PF and PPF?

EPF and PPF differ from each other in many ways. To understand these differences better, we’ve tabulated them, so you can compare and comprehend the details at a glance. 

Point of difference

EPF

PPF

Eligibility

Salaried employees working in organisations with 20 or more employees

(other salaried employees can also invest, provided their organisation has a policy in place)

All Indian citizens, whether salaried or self-employed, and whether employed in the formal or the informal sector

Contributing party

Employee and employer

Individual

Minimum investment

12% of the salary

Rs. 500 per year

Maximum investment

No upper limit for the employee’s contribution

Rs. 1,50,000 per year

Rate of interest prevailing

8.5%

7.1%

Tenure

Until retirement

15 years

Tax benefits

Returns from EPF are tax-free (but any withdrawals that happen before 5 years of continuous service are up are taxable)

Investments in PPF and the returns therefrom are exempt from tax

Loan facility

You can take an advance against 100% of your EPF balance

Loans against your PPF balance are permitted between the 3rd and 6th year of the tenure

Premature withdrawal

Allowed if you’re unemployed for more than 2 months, and also for the purpose of weddings, construction of a house or medical requirements

Allowed after the completion of the 7th year of the tenure

Wrapping up

This is how EPF and PPF differ from each other. But despite these differences, they’re both excellent investment options for investors with a long-term view. Aside from these schemes, there are also many other options backed by the government of India. We’ll take a look at some of these in the upcoming chapter of Smart Money.

A quick recap

  • Employee Provident Fund is an investment scheme that has been developed by the government of India to help employees in the organised sector save up for their future.
  • Generally, 12% of the monthly salary goes towards the EPF contribution. This deduction happens automatically and compulsorily.
  • Any employee who works in a company that employs more than 20 people must mandatorily have an EPF account. 
  • However, companies with fewer than 20 employees can also open EPF accounts for their workforce.
  • PPF (or Public Provident Fund) is also a scheme that’s backed by the government of India. And like the EPF scheme, PPF is also a retirement-focused investment option. 
  • Anybody can invest in PPF – salaried or self-employed. 
  • The minimum amount an investor should contribute each year is Rs. 500. This is mandatory, so the account can remain active.
  • The maximum amount an investor can contribute each year is Rs. 1,50,000.
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