EPF vs PPF: Key differences, rules, tax benefits and returns explained

The Employees' Provident Fund (EPF) and the Public Provident Fund (PPF) are two widely used long-term savings instruments in India, each governed by a different set of rules. While EPF is primarily meant for salaried employees and is linked to employment, PPF is a voluntary scheme in which any individual can open an account and make contributions.

Both schemes offer tax benefits and fixed interest rates notified periodically by the government, but they differ in terms of eligibility, contribution structure, withdrawal rules and maturity period. Here's a look at the structure of each of these investment schemes.

Employees' Provident Fund (EPF)

EPF is administered by the Employees’ Provident Fund Organisation (EPFO) under the EPF Act of 1952. While PPF is available to all Indian citizens, EPF is a retirement savings scheme available solely to the salaried class.

It operates through joint contributions from both the employer and the employee, with the accumulated corpus paid out as a lump sum at the time of retirement. The scheme is primarily applicable to salaried individuals in the organised sector. The current EPF interest rate stands at 8.25% per annum, which is higher than that of PPF and in line with the rate offered under Voluntary Provident Fund (VPF).

In terms of tax benefits, employee contributions up to ₹1.5 lakh annually are exempt under Section 80C of the old tax regime. Employers' up to 12% contribution (below ₹7.5 lakh) is exempt under the old and new tax regimes.

For employees, interest on accumulated contributions up to ₹2.5 lakh is tax-free, while interest on employer contributions is tax-free.

Who can invest in EPF?

As per the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, EPF registration is mandatory for:

• Establishments with 20 or more employees.
• Employees earning up to ₹15,000 per month, which includes basic pay and Dearness allowance (DA) at the time of joining.

Once enrolled, an employee continues to remain a member even if their salary exceeds ₹15,000. Both the employer and employee are required to contribute as per EPF rules.

Notably, EPF coverage may extend beyond the mandatory criteria:

• Employees earning above ₹15,000 per month at the time of joining can be enrolled with the mutual consent of the employer and employee.
• Establishments with fewer than 20 employees can opt for voluntary EPF registration.

Once such coverage is approved, all EPF provisions, including contributions and compliance requirements, become applicable.

Public Provident Fund (PPF)

PPF is a government-backed savings scheme with guaranteed tax-exemption on investment, maturity amount and interest earned (aka EEE benefit), at a fixed interest rate of 7.1% this quarter. It is considered one of the safest investment options for retirement and tax planning in India, especially if you are a conservative or risk-averse investor.

A PPF account is offered by any post office or public bank and some private banks in India for a minimum deposit of ₹100-500 a month. This has a KYC requirement where you will need to submit the duly filled form with your Aadhaar Card copy, proof of residence, and a passport-size photo. You can also directly open a PPF account through your bank through online banking or mobile banking.

The maximum amount one can invest in PPF is ₹1.5 lakh annually. The lock-in period is 15 years, post which you can either withdraw your funds with the interest earned, or extend the scheme's tenure in blocks of five years, as many times as you want. The PPF account can be extended with or without fresh contributions. If extended without contributions, the existing balance continues to earn interest for as long as it is extended.

Hence, an extension may be an ideal choice if an individual is not in need of immediate funds and wants continued tax-free compounding. Withdrawal can be a possible route if you seek liquidity or want to re-allocate your funds in different assets such as stocks, mutual funds, or other government-backed schemes.