EPF vs PPF : Which You Should Opt ? - Finance With Atul


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Saturday, October 16, 2021

EPF vs PPF : Which You Should Opt ?



EPF stands for Employee Provident Fund and generally in local language it is called as PF or provident fund. On the other side PPF stands for Public Provident Fund. But where you should invest? First of all let’s focus on EPF. This is for all those employees who work in a company, which is registered under the act provident fund, on salary basis. The organizations, with 20 plus employees, required registering for the EPF scheme and if employees are fewer than 20 then organization can also register voluntarily. All the employees who earn less than 15000 Rs per month should have EPF account mandatorily.  Most companies then extend it to all the employees, because it has very good benefits. It has three main benefits. 



The first one is disciplined investing. I love disciplined investing because it is the only way to create a long term wealth without it pinching you and it also requires minimal research possible. SIP or Systematic Investment Plan is the best way to invest in share market because it doesn’t require tracking trend. The same way is EPF. When the employer will process your salary every month, before that day they will deduct a certain PF amount from it and contribute to it from their own side which will go toward your investments. This is something that you will not get in your hand, so the huge figure that you see on your CTC slip and it is less when you get the salary in hand, one of its deductions is toward PF and I will tell you why it is important to know for you that how much is this deduction. This was first benefit – disciplined investing. 


Second benefit is tax benefits. Its tax benefits are twofold; the first one is that it comes under section 80 C which is the main clause for tax deductions; all your yearly PF investments are deductible which means whatever PF investments you make through a combination of your contribution and the contribution of your company, all of that would be deductible to the limit of what is there under section 80C. Currently, the limit of deductible amount under section 80C is Rs. 1.5 Lakhs. And the best thing is that whatever money you will invest after deducting in EPF account, whatever the final amount you will get on it will be tax free. You will not have to pay any tax on it. 


Third benefit and the most important benefit is risk free guaranteed return. There is also another instrument which also gives risk free return but I will never suggest it especially if you are in your 20s – FD or Fixed Deposit. Fixed Deposit will give you fixed and risk free return. In the same way EPF gives you the returns. Every quarter, the rate of return for EPF is decided, and in this financial year, the rate of return of EPF is 8.5%. This is the biggest difference between FD and EPF. If you invest in EPF and inflation is at 6% and this is giving 8.5% tax free then you can beat inflation by 2.5%. Because of these 3 things, EPF is a great way to invest in my opinion. 



The best thing about EPF is that it never reaches your bank, so it’s almost like, not your money but it is still your money because you will reap the benefit of it much later when you will actually be sitting on a lot of money.


Now How Is It Calculated?

Suppose your basic salary is Rs. 20000. 12% of basic salary is what you will contribute towards your EPF investment; this means 12% of 20000 that is Rs. 2400 will be deducted from your salary and goes to your EPF account. Now your employer will also contribute, on their behalf, of the same amount which is 12%. So they will also contribute Rs. 2400 and that will go towards your EPF account. This means at the end of every month your EPF account will have Rs. 4800. This is how it basically works. 


There are three ways in which a PF can be deducted. First way; if your salary is Rs. 15000 then 12% rule as discussed above will be applicable and the amount will increase by 8.5% every year. Second way; if your salary is more than Rs. 15000 then you has two options, first option is called the minimum investment i.e. 12% of 15000 i.e. both employee and employer will contribute Rs 1800. Second option is investing through 12% of basic salary. In this case according to basic salary of 20000, an amount of Rs. 2400 will be deducted from your side and Rs. 2400 from employer side. So you can say Rs. 4800 at the end of month in EPF account.

The main important point to be notice is that whenever you resign from the company then you can withdraw the money in your PF account after 2 months. If that service or employment was of less than 5 years, tax will be applicable and no tax if more than 5 years.  



Now the problem in India is that every individual is not employed and even if it is employed in a company which doesn’t have 20 plus employees then it is possible that they are even not eligible for EPF. In India only 5% of populations are corporate and pays tax or work in small companies or not registered in Provident Fund act. Should they not get the benefit? So there is something called PPF or Public Provident Fund. The biggest difference is that if you are not an employee of a company then you can opt for PPF, it doesn’t matter who you are. It may be your parents minor or anyone who is citizen of India. As there is no restriction in PPF so its rate of return is less than EPF. At the time of writing this article, the rate of return is 7.1%. You can open a PPF account in any bank, private of govt. It requires investment of minimum Rs. 500 and maximum of Rs. 1.5 lakh. The investment period for PPF is 15 years and it can be extended indefinitely by 5 years. Partial withdrawal is allowed from 7th year to 15th year.


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