Most of us have heard or read about EPF and PPF, but many of us do not really know what is the difference and benefit of these.

As always, I will keep it simple English and straight forward explanation.

EPF is Employees provident fund i.e. if you work in an organisation that has more than 20 full time employees then it is mandatory for the organisation to register under the Provident fund act and have the EPF account for the employees.

If the salary of the employee is less than 15,000 then company has to mandatory deduct 12% of the basic salary and deposit it in the EPF account and same contribution has to be done by the company.

If the salary of the employee is more than 15,000 then there are two options – 1) Deduct EPF on whatever is the basic salary i.e. 12% of the basic Salary or 2) Deduct EPF on maximum of 15,000 i.e. minimum contribution to the EPF account.

Most company opt for Option 1.

Benefits of the EPF

1. When your company deposits the money in EPF you get deduction under Section 80C, so in simple words – the amount which is deposited in EPF amount is not subjected to Tax (maximum on 1.5lac)
2. When you get the withdraw the money then its tax free (unless you withdraw early)
3. It is a risk free investment with guaranteed return of 8.5% return per annum i.e. better than fixed deposit and in long run better than most of the other investment options.

When you can withdraw the EPF that even Tax free ?

1. At retirement with no tax
2. If you worked in a company for 5 years then you can withdraw after 2 months of leaving the company (it is not total employment across companies, its in one company at a time).

Idea behind the EPF, is to put aside money at the source (i.e. salary) for the long terms which will get fixed returns and enjoy the compounding benefit for the long term. So that employees will have the money for the retirement when they need it.

So, what about people who are not employed or not working in company with more than 15 employees ?, answer is PPF i.e. Public Provident fund.

Anyone irrespective of their employment status can open a PPF account with most of the banks or any post office. You can deposit minimum INR 500 or maximum 1.5 Lac in year in the PPF account which will give you fixed return of 7.1% (current interest rate).

It has the same compounding benefit of the EPF, minimum tenure is 15 years i.e. you cannot withdraw money for 15 years with some exceptions and it can further be extended by block 5 years each i.e. 20 Years or 25 Years and so on.

If you need to withdraw before 15 years then you have following options –

1. At 3rd or 6th Year, you can take loan on your PPF account at the interest rate of PPF rate +2%.
2. From 7th to 15th year can withdraw upto maximum of 50% for certain reasons i.e. Medical, buying house, Marriage etc

Taxation – same as EPF, its tax free i.e. 80C deduction at investment, interest earned on PPF is tax free and when you withdraw it then its tax free!

So, net net, following the summary

EPF and PPF are for the long term i.e. you will get risk free return at fixed percentage for the events which will happen after long period time.

Give this is risk free and gives fixed return, you should opt to deposit in these options and ensure that you do not with draw the money unless you really need it.