EPF and PPF are cases of classic asset class mismatch – they are savings tools which are implemented for the long term. So technically they are not ideal investment avenues. However as a salaried person, one does not have an option not to invest in EPF. One could make withdrawals for suitable alternative investments if he/she has the self discipline to invest for the long term.
There are many among us who have this doubt about EPF and PPF. Many of the salaried wonder whether they need to contribute to the PPF too. Those who are not salaried need to differentiate between the bank recurring deposit and the PPF. So here goes a detailed account of what EPF and PPF really are and who can invest in either of them.
Provident Fund
A provident fund is created with a purpose of providing financial security and stability to elderly people. Generally these funds are formed / started when one starts his/her career and is withdrawn on retirement. The contributions/ investments are made on a regular basis (monthly in most cases). The quantum of investment may vary. The investments made by a number of people / employees are pooled together and invested by a trust.
EPF (Employees Provident Fund)
This is implemented by the Employees Provident Fund Organisation of India. Any company with over 20 employees is required to register itself with the EPFO. 12% of the Basic, DA, and cash value of food allowances has to be contributed to the EPF account.
If one changes company, then the EPF account can be transferred to the new company.
PPF (Public Provident Fund)
This is implemented by State Bank of India with support from India Post. Formed by an act of Parliament the PPF is accessible by anyone who wishes to save towards ones future. The minimum contribution is Rs.500/- and the maximum is Rs.70,000/- per year.
A passbook is given and the deposit has to be made at an assigned post office of SBI office. Change in the post office or the SBI branch can be done by submitting an application. The passbook has to be carried along to make the deposit at all times.
Some Unique aspects of PPF
PPF has some unique features which needs mention. The first one is that PPF is for the bread winer and his/her family. So a father and his children (yet to reach age 18) together can have only one account. This limits the contribution as a group to only Rs.70,000/-. The mother can however have her own account.
The other unique feature is that in case of insolvency, the PPF account cannot be attached with the other assets for debt settlement process. This feature may be of use in special circumstances, like business people who are in risky businesses. However the PPF account is not secure in case of Income Tax evasion.
EPF and PPF Compared
Have seen the basic, let us compare EPF and PPF against different parameters.
| S.No. | Comparison Parameter | EPF | PPF |
| 1 | Who can Invest? | Any Salaried person. Others not allowed. | Any Indian, except NRIs. |
| 2 | How much can one invest? How frequently? | Statutory is 12% of basic +DA. Can voluntarily increase the contribution. Frequency is monthly from the salary itself. | Any Amount between Rs.500/- and Rs.70,000/- per year. A maximum of 12 contributions can be made per year subject to a minimum of Rs.100 per event. |
| 3 | Current Returns | 8.5% | 8% |
| 4 | Loan Options | Can make withdrawals for marriage or construction of house by presenting suitable documents. Loans also possible but not in favour with contributors and EPFO. | Can take loans of upto 50% of the balance of the 4th from the 6th year onwards. For all future years the same rule or the 50% of the balance in the account will apply. |
| 5 | Maturity | Can be closed when switching jobs. Can transfer account to new company till retirement. | 15 years. Can be extended indefinitely by extending for 5 years each after that. |
| 6 | Tax Treatment | Contribution gets Section 80C benefit. Maturity is also tax free if contribution is for over 5 years including transfers from different companies. | Contribution gets Section 80C benefit. Maturity is also tax free. |
| 7 | Convenience | Good for the contribution as deducted from the salary itself. Poor for withdrawal or for loans | Poor for the contribution, withdrawal and loans. Good for the quantum of investment and frequency of investment. |
Should one invest in EPF and PPF?
EPF and PPF are cases of classic asset class mismatch – they are savings tools which are implemented for the long term. So technically they are not ideal investment avenues. However as a salaried person, one does not have an option not to invest in EPF. One could make withdrawals for suitable alternative investments if he/she has the self discipline to invest for the long term.
For those who are spendthrifts, EPF and PPF give an easy means for securing their future, as the inconveniences for making a withdrawal are many.
For business people, PPF becomes an attractive option in case they have heavy loans or delayed payment from clients. In the worst case of business failure, atleast their PPF account will give them much needed support to start again.