EPF vs VPF vs PPF: Taxation and withdrawal rules explained

  • The three major government-backed retirement plans, Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), and Public Provident Fund (PPF), operate differently in terms of interest rates, taxation, and withdrawal guidelines.

Vipul Das
First Published14 May 2023, 03:20 PM IST
There are three main types of provident funds in India, namely the Employees Provident Fund (EPF), Voluntary Provident Fund (VPF), and Personal Provident Fund (PPF).
There are three main types of provident funds in India, namely the Employees Provident Fund (EPF), Voluntary Provident Fund (VPF), and Personal Provident Fund (PPF).

The three major government-backed retirement plans, Employee Provident Fund (EPF), Voluntary Provident Fund (VPF), and Public Provident Fund (PPF), operate differently in terms of interest rates, taxation, and withdrawal guidelines. Your unique financial objectives, eligibility, and circumstances all play a role in selecting the best provident fund programme. Generally speaking, EPF and VPF are excellent choices for those who are salaried, while PPF is strongly advised for those who are self-employed. In terms of taxation and withdrawal rules of EPF, VPF, and PPF, investors should be much aware of while taking investment decisions, let’s know from our industry experts what they have to comment on this.

Dr. Suresh Surana, Founder, RSM India

The tax treatment for EPF (Employee Provident Fund), VPF (Voluntary Provident Fund) and PPF (Public Provident Fund) are as follows:

ParticularsEPF (Employee Provident Fund)VPF (Voluntary Provident Fund)PPF (Public provident fund)
MeaningEPF is a provident fund created with a purpose to provide financial stability and security at the time of retirement. Under this scheme, salaried employees working in organization registered under EPFO are mandatorily required to contribute 12% of the Basic Salary + Dearness Allowance, the employers are required to contribute an amount at par with the employee’s contribution.VPF is an extension of the employee provident fund. Hence, under VPF, an employee can make maximum contribution of up to 100% of his Basic Salary and Dearness Allowance.PPF is a government guaranteed fixed income security scheme available for all and not restricted only to employees.
TaxationThe tax implication for EPF would depend on the nature of the Provident fund i.e. whether it is recognised or unrecognised as follows:

The tax implications of VPF are as follows:

(i)  Any contribution made to VPF would be allowed as a deduction under Section 80C subject to the threshold of Rs. 1.5 lakhs.

(ii)  Further, any interest earned on VPF would be exempt from tax. However, any interest to the extent it relates to amount of PF contribution exceeding Rs. 2,50,000/-   made by employees would be taxable.

For the purpose of computing the interest on VPF/ RPF, the annual provident fund statement would be maintained in two separate parts-taxable and non-taxable contribution accounts with effect from the financial year 2021-22 onwards:

-   The non-taxable contribution account starting from the financial year 2021-22 shall have the details of opening balance, contribution below the threshold, interest earned on such contribution and withdrawals made in the relevant year.

-  The taxable contribution account starting from the financial year 2021-22 shall have the details of the contribution made above the threshold, interest earned thereon and withdrawals made in the relevant year.

(iii)  Any lumpsum amount earned from RPF and VPF would be exempt from tax provided the withdrawal is made after 5 years. In case of partial or full withdrawal before such period of 5 years, the same would be subject to tax.

Investment in PPF is allowed as deduction u/s 80C subject to threshold of Rs. 1,50,000/-.

The PPF interest and maturity amount are also tax-exempt u/s 10(11) of IT Act.

 ParticularsRecognized PFUnrecognized PF
Employer’s ContributionTaxable as “salary” u/s 17(1) if such contribution exceeds 12% of salaryNo taxability at the time of contribution
Employee’s ContributionContribution made by employee is eligible for deduction u/s 80C subject to threshold limit of Rs. 1.5 lakhsNot eligible for Deduction u/s 80C
Interest credited on Employee’s ContributionIt is taxable as salary u/s 17(1) to the extent such interest exceeds 9.5% p.a.No taxability (at the time of credit) Taxable at the time of termination under ‘Other Sources’
Interest credited on Employer’s ContributionIt is taxable as salary u/s 17(1) to the extent such interest exceeds 9.5% p.a.No taxability (at the time of credit) Taxable as Profit in lieu of Salary u/s 17(3) at the time of termination
It is pertinent to note that an aggregate upper limit of Rs. 7.5 lakhs would be applicable in respect of employer’s contribution in a year to NPS, superannuation fund and recognized provident fund of the employee and any excess contribution would be taxable. Any contribution in excess of the threshold limit of Rs. 7.5 lakhs would be taxable as perquisite u/s 17(2)(ia) r.w. Rule 3B of the Income Tax Rules.

Pratik Vaidya MD, and CVO, Karma Global

Provident funds are one of the most popular investment options in India, offering financial security and stability in the future. There are three main types of provident funds in India, namely the Employees Provident Fund (EPF), Voluntary Provident Fund (VPF), and Personal Provident Fund (PPF). In this article, we will compare these three schemes to help you understand which one is best for you.

Eligibility: EPF is mandatory for employees working in organizations registered under the EPFO (Employees’ Provident Fund Organisation, established via the Employees’ Provident Fund and Miscellaneous Provisions Act 1952), whereas both VPF and PPF are open to all individuals, including non-salaried employees and those from the unorganized sector.

Contribution: EPF mandates a contribution of either 12% of an employee's Basic + Dearness Allowance and the employer is also obligation to pay an equal percent of contribution, whereas both VPF and PPF contributions are voluntary. Only salaried individuals can sign up for VPF, whereas both salaried and non-salaried individuals can contribute to PPF.

Tax Benefits and Returns: Tax Benefits have been given to all three schemes under Section 80C of the Income Tax Act. However,10% TDS is deducted on EPF Balance if it is withdrawn before completion of 5 years of service if the amount is above Rs. 50000/-, Whereas in terms of Returns, both EPF and VPF offer the same rate of interest, which is currently 8.15% per annum. Whereas PPF offers a slightly higher interest rate of 7.1% per annum, compounded annually.

Withdrawal: EPF offers partial and complete withdrawal options, subject to certain conditions such as when the employee remains unemployed for 2 months. VPF allows for complete withdrawal but only after completion of 5 years and it is taxable if withdrawn before the lock-in period, whereas PPF has a lock-in period of 15 years, after which partial withdrawals are permitted.

Pros and Cons: EPF offers a guaranteed rate of return and is risk-free, making it an ideal investment tool for retirement planning, since the contribution percentage is fixed and it is mandatorily payable by both the employee and the employer. While VPF offers similar benefit with the added advantage of a higher contribution amount, but it is only open to salaried individuals and the employer is not liable to contribute an equal amount. Whereas, PPF offers a higher rate of interest and is open to all individuals, but it has a long lock-in period, limited withdrawal options and no involvement of the employer.

Therefore, choosing the right provident fund scheme depends on your individual financial goals and circumstances. If you are a salaried individual looking for a risk-free investment tool, EPF and VPF are great options. But if you are a self-employed or non-salaried individual, PPF is a good choice, provided that you are comfortable with the long lock-in period. Ultimately, each scheme has its own pros and cons, and it's important to weigh these factors before making a decision.

Suman Bannerjee, CIO, Hedonova

The choice between EPF, VPF, and PPF depends on your individual financial goals, risk appetite, and preferences. Here are some key factors to consider:

EPF: EPF is a mandatory retirement savings scheme, and both the employee and employer contribute to it. It offers tax benefits and tax-free interest earnings. EPF is suitable for individuals who are employed and looking for a retirement-focused savings option. However, the contribution amount is fixed and determined by the employee's salary structure.

VPF: VPF is an extension of EPF, allowing employees to voluntarily contribute a higher amount to their EPF account. The tax treatment and withdrawal rules for VPF are the same as EPF. VPF is beneficial for individuals who want to increase their retirement savings beyond the mandated EPF contribution.

PPF: PPF is a long-term savings scheme available to both employees and self-employed individuals. It offers tax deductions on contributions, tax-free interest earnings, and tax-free maturity amount. PPF has a lock-in period of 15 years, but partial withdrawals and loans are allowed after a specific period. PPF is suitable for individuals looking for long-term savings with flexibility for partial withdrawals.

In summary, if you are an employee, EPF is mandatory, and you can consider VPF if you want to contribute additional funds to your EPF account. PPF is a separate scheme available to both employees and self-employed individuals, providing long-term savings with tax benefits.

Ashish Misra, chief operating officer - retail banking at Fincare SFB

EPF, VPF, and PPF are all tax-saving investment options. EPF is an employee contribution-based retirement savings scheme, while VPF is a voluntary contribution to the EPF by the employee. PPF is a public provident fund for individuals. While PPF withdrawals are tax-free, EPF and VPF withdrawals are taxed if made before five years of continuous service. PPF withdrawals have a 15-year lock-in period, while EPF and VPF withdrawals are tax-free after five years of continuous service. 

In terms of taxation, EPF and VPF contributions are eligible for tax deduction under Section 80C, while PPF contributions are fully tax-deductible. However, interest earned on EPF and PPF is tax-free, while VPF interest is taxable. In conclusion, PPF is a suitable choice for long-term tax-saving and wealth growth, whereas EPF and VPF are appropriate for long-term retirement savings. Before choosing the appropriate vehicle, one needs to carefully weigh the investment horizon because withdrawal and tax implications vary between the three.

Rahul Jain, President & Head, Nuvama Wealth

Taxability of interest

For all practical purposes, the EPF and VPF are the same. VPF allows investment over and above the mandatory contribution under the EPF. As of now, interest on an employee’s contribution to EPF and VPF is tax-free for contributions made up to 2.5 lakh every financial year. The limit is 5 lakh for government employees. Interest on employee contributions (including VPF) of more than 2.50 lakh will be taxable as income from other sources. Interest on contributions made by an employer is exempt. PPF – interest paid by PPF is exempt from tax.

Withdrawal:

Total withdrawal from EPF/VPF can be made only after the age of 58 years. Partial withdrawal is allowed before 58 years for purposes such as marriage, medical expenses, house construction, and education. As per the revised rules, withdrawals to the tune of 75% can be done in case of one month of unemployment. Withdrawal made before the completion of a minimum of five years from the date of the first contribution will be taxable. The period of five years includes the tenure with the previous employer. Withdrawals made after five years are exempt from tax. PPF allows the withdrawal of funds after 6 years from the account opening date, and the withdrawal amount is limited to 50% of the total available balance at the end of the fourth year from the date of account opening.

Saakar Yadav, Director & Founder, MyITreturn.com

EPF stands for Employee Provident Fund, VPF for Voluntary Provident Fund and PPF for Public Provident Fund.

Employee Provident Fund (EPF), and Voluntary Provident Fund (VPF) are only for salaried Individuals while Public Provident Fund (PPF) is available for both Salaried and Non- Salaried Individuals.

EPF is contributed by employers and employees, while for VPF, the contributor here is only the employees. However, PPF can be contributed by anybody.

As for the amount that can be contributed, for EPF – the maximum amount is 12% of Basic Salary plus Dearness Allowance, For VPF, it is the amount up to basic salary plus dearness allowance, however, in regard to PPF there is a cut off for 1,50,000.

Similarly, the deductions available for EPF, VPF & PPF stay standard that is up to 1,50,000 u/s 80C.

In regard to the Taxation on maturity, EPF & VPF are similar where the withdrawals are tax-free if the employee has completed five years of continuous service. While for PPF, withdrawals are fully tax-free.

In terms of taxation on pre-withdrawals, a portion of employee contribution is taxable if the employee has claimed deduction u/s 80C at the time of contribution and the Interest on employee Contribution is fully taxable for both EPF and VPF. However, under EPF, the employer contribution & Interest it is fully taxable. On the contrary, under PPF, individuals are fully exempted from taxation on pre-withdrawals.

Anurag K, COO, Omkara Beverages & Hospitality Pvt Ltd

Employee Provident Fund (EPF), Voluntary Provident Fund (VPF) & Public Provident Fund (PPF) are all debt investment options. These carry low-risk profile while offering stable returns over long-term. Hence, these are the ideal vehicles to save for the long-term goal or build a retirement corpus.

EPF & VPF is available only to the Salaried class while PPF is available to both Salaried & non-salaried individuals. Salaried employees who are already contributing to the EPF scheme but want to invest further can thus choose to contribute between VPF or PPF.

Duration: Investment duration forPPF is 15 years while EPF/VPF remains active until the time the investor retires or resigns.

Rate of Return: The Rate of Return is higher for EPF/VPF than PPF. The currentPPF interest rateis at 7.1% while that of EPF/VPF is at 8.1%. These rates are revised from time to time.

The choice between VPF & PPF thus depends on an individual preference over investment horizon Vs rate of return. If the financial goal of the investor is within 15 years, such as child’s higher education or marriage, PPF is a better tool for investment. However, if an investor wants to earn higher returns, EPF/VPF is the better choice.

Taxation: EPF & PPF are both eligible for tax deductions under Section 80C up to a maximum of 1.5 lacs per year. Interest earned from PPF are tax-free. However, proceeds from EPF/VPF are tax-free but only if the employee has worked for the employer for at least five years or if withdrawn at maturity. Any withdrawal before completing five years is taxable.

To conclude, EPF, VPF and PPF are all excellent tax-saving options. They are backed by the sovereign guarantees and offer a stable rate of return on the investments, however, there are some factors making each suitable for a particular investor.

Karan Aggarwal, Chief Investment Officer, Elever

With Exempt-Exempt-Exempt status, VPF, EPF, and PPF come across as tax-efficient investment vehicles that provide safe, assured inflation-beating returns in the range of 7%-9

Having said that, when it comes to withdrawal, VPF scores over EPF and PPF. While PPF is supposed to mature after 15 years, EPF corpus is eligible for tax-free withdrawal after retirement. Pre-mature withdrawals are allowed but they are subject to various restrictions and penalties.

On the other hand, VPF (employee contribution to PF above mandatory EPF contribution equivalent to 12% of basic salary + DA) can be withdrawn without any penalties and restrictions after 5 years. 

However, it must be noted that with changes made in the budget for FY 2021-22, interest on annual employee contributions in PF (sum of EPF and VPF contribution) above 2.5 Lakhs would be taxable as per slab.

Somya Srivastava, CEO of Prayatna Microfinance

The various distinctions between EPF, VPF, and PPF must be understood in order to do financial planning. The taxes and withdrawal procedures were made clear by Prayatna Micro Finance. In case you forgot, PPF offers tax-free contributions, earnings, and withdrawals. 

While VPF allows for additional voluntary contributions but is subject to the same tax regulations as EPF, PPF has a 15-year maturity period and offers people a solid means of long-term savings and tax-efficient asset growth. 

Employee Provident Fund, or EPF, is a required savings program for salaried workers that provides tax deductions for contributions and tax-exempt withdrawals under certain circumstances. Choose wisely, and you'll empower your financial journey.

 

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First Published:14 May 2023, 03:20 PM IST
HomeMoneyPersonal FinanceEPF vs VPF vs PPF: Taxation and withdrawal rules explained

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