Difference between EPF and PPF -Interest Rate & Tax Benefits

Introduction

Over the years, the Government of India has launched several savings schemes to encourage people to invest and build a secure financial future. These schemes have helped promote financial literacy and instil a sense of financial discipline among the population. Among these schemes, the Employee’s Provident Fund and the Public Provident Fund are the most popular ones. Here, we’ll explore the many areas EPF vs PPF differ from one another, including meaning, returns, tax benefits, and pros and cons of each.

What is EPF?

EPF stands for the Employees’ Provident Fund. It is a mandatory retirement and savings scheme for salaried individuals. The main goal of the EPF is to give salaried individuals financial security in their post-retirement years. Here are some points that will help you understand what is epf exactly:

• The EPF is run by the Employees’ Provident Fund Organization (EPFO) under the Ministry of Labour and Employment. This organization is responsible for the management and regulation of the EPF scheme.
• The EPF is a type of mandatory scheme, which aims to help salaried individuals build a retirement fund during their working years. Salaried individuals must contribute to the EPF, and any organisation with 20 or more employees must register with the EPFO.
• Contribution towards the fund is made by both – the employee as well as the employer. Both contribute 12% of the employee’s salary (basic salary + dearness allowance).
• Of the 12% contribution made by the employer, 8.33% goes towards the Employees’ Pension Scheme, and 3.67% to EPF. The entire employee contribution goes towards EPF.
• These savings collect interest which is compounded yearly and credited to the employee’s EPF account. This interest rate is declared every year by the EPFO.
• The latest interest rate is 8.25% per annum.
• Employees can exceed the compulsory 12% EPF contribution by going for the Voluntary Provident Fund. Under this scheme, employees can contribute a larger percentage of their basic salary and dearness allowance voluntarily, but employers are not required to match this contribution.
• When changing jobs, employees can transfer their balance from the old employer to the new one. Since the Universal Account Number for EPF stays the same across all jobs, salaried individuals can easily track their accounts/ IDs using them.
• Full withdrawal is allowed when the employee reaches retirement age, which is set at 55 years by the EPFO. Partial withdrawals from the account are also permitted in case of emergencies or loan repayment.
• In case the individual is unemployed for a month, a withdrawal of 75% is allowed. Full withdrawal can be made if the unemployment continues for two months.
• EPF falls under the Exempt, Exempt, Exempt basket, so the contributions, interest, and withdrawals are all exempt from tax.
• Section 80C of the Income Tax Act allows individuals to claim deductions up to Rs. 1.5 lakh on contributions made to EPF. The interest earned on EPF is also free from tax. However, according to the changes made on 1st April 2021, the interest earned on EPF contributions exceeding Rs. 2.5 lakh per annum is now subject to tax (only affects non-government employees).
• Withdrawal after 5 years is tax free as well. Any withdrawals made before this mark attract tax on the interest earned.

What is PPF?

PPF stands for Public Provident Fund, which is another long-term savings scheme introduced and regulated by the government. The key factor that sets it apart from the EPF is that it is a voluntary scheme and is open to all citizens of India. Here are some facts that will help you understand what is ppf scheme:

• Any Indian citizen, whether salaried or self-employed can open a PPF account. Even minors can have an account opened in their name (with guardians associated).
• Individuals holding EPF can also open a PPF account.
• Citizens can open a PPF account through any national or authorised private banks and post offices.
• Non-resident Indians cannot open any new PPF accounts, however, they can still operate any existing PPF accounts until maturity.
• Only 12 contributions can be made to the PPF account in a financial year. The minimum amount that one has to invest is Rs. 500, while the maximum investment amount per year is Rs. 1.5 lakh.
• When a guardian opens a PPF account on behalf of a minor, the total contribution limit of Rs. 1.5 lakh for tax deductions applies to all accounts held by the individual, which includes the minor’s PPF account. For example, you cannot contribute Rs. 1.5 lakh to your personal account and also Rs. 1.5 lakh to your minor child’s account in the same year, as it totals Rs. 3 lakh.
• The government decides the interest rate of PPF every quarter. For Quarter 4 of the financial year 2024-25 (January 2025 to March 2025), the interest rate was set at 7.1% compounded annually.
• The PPF has a maturity of 15 years. After this mark, individuals can either withdraw their funds or extend the duration by 5 years at a time. During these extensions, it’s not mandatory to make any further contributions and the fund will continue to accumulate interest.
• If one does not withdraw their funds after maturity, the default option, i.e. an extension of 5 years is automatically activated. From here, only 1 withdrawal can be made per year.
• After the PPF enters its 7th year, partial withdrawals can be made. The maximum amount that can be withdrawn is up to 50% of the balance at the end of the 4th year or 50% of the balance at the end of the immediately preceding year, whichever is lower.
• The PPF is also an Exempt, Exempt, Exempt scheme. Thus the principal amount, interest earned, and withdrawals are all tax-exempt.
• The old tax regime allows further relief from tax burden. Up to Rs. 1.5 lakh worth of PPF contributions per year can be deducted from one’s income under Section 80C.

Key Differences Between EPF and PPF

Have a look at the difference between epf and ppf summarised below:

Factor	Employees’ Provident Fund	Public Provident Fund
Type of Scheme	For salaried individuals, EPF is a mandatory savings scheme.	PPF is a voluntary scheme.
Who can invest?	Only salaried individuals can invest in the EFP.	Any Indian citizen can open a PPF account.
Minimum Investment Amount	12% of salary (basic + dearness allowance) must be contributed.	A contribution of at least Rs. 500 per year is mandatory.
Maximum Investment Amount	Through the Voluntary Provident Fund, employees can contribute any amount above the mandatory 12% of their basic salary and dearness allowance.	A maximum contribution of Rs. 1.5 lakh can be made toward PPF.
Rate of Return	EPF interest rate is decided by the Employees’ Provident Fund Organisation annually. The recent rate is 8.25% per annum.	The government declares the PPF interest rate on a quarterly basis. For Q4 of 2024-25, the interest rate is 7.1% per annum.
Lock-in Period	Until retirement, which is considered as 55 years by EPFO. Partial withdrawals are allowed under specific conditions.	Funds are locked in for 15 years.
Withdrawals	Full withdrawals can be made after retirement. Funds can also be fully withdrawn after 2 months of unemployment.Partial withdrawals are allowed for certain emergency situations.	Full withdrawal after maturity, however, partial withdrawals can be made after the account has been maintained for 6 years.
Tax	EPF falls under the EEE category, so there is no taxation on the principal amount, interest, or withdrawals. However, interest on contributions over Rs. 2.5 lakh per year attracts tax starting from April 2021. If funds are withdrawn before 5 years, a tax on interest is charged.	PPF is also an EEE instrument, which makes it one of the most tax-efficient options available.

EPF or PPF: Which is Better?

Both EPF and PPF are good long-term savings instruments and useful for financial goals like building a retirement fund or planning children’s weddings. They both allow Rs. 1.5 lakh tax deductions under Section 80C of the Income Tax Act and are backed by the government, which makes them safe investment instruments. The main difference between epf and ppf is that the former is a mandatory scheme for salaried individuals, while the latter is a voluntary savings scheme for all Indian citizens. There’s no clear answer to epf or ppf which is better of the two.

If you are a salaried employee, you will have an EPF where you and your employer will make regular contributions. Self-employed individuals simply cannot contribute to EPF. Being a salaried individual, however, does not bar you from contributing to PPF and you are allowed to hold both accounts.

If you are a self-employed individual, you’ll only be able to invest in PPF. It’s a tax-efficient option as it does not attract any tax on contributions, interest, or withdrawals.

EPF vs PPF Interest Rates

The PPF interest rate is announced quarterly by the Government of India. For Q4 of the financial year 2024-25, the rate is 7.1% per annum.

On the other hand, the EPF interest rate is annually declared by the Employees’ Provident Fund Organization. The 2023-24 interest rate is 8.25% per annum.

Tax Benefits of EPF and PPF

EPF Tax Benefits:

• EPF falls under the Exempt, Exempt, Exempt category. Tax is thus not levied on contributions, interest, or withdrawals.
• Up to Rs. 1.5 lakh contribution can be claimed as tax deductions annually under Section 80C of the Income Tax Act.
• No tax is levied on withdrawals after 5 years. Withdrawals before this mark, however, attract tax on interest earned.
• After April 2021, contributions above Rs. 2.5 lakh per year also attracts tax on the interest earned on the excess amount. 

PPF Tax Benefits:

• PPF is also an Exempt, Exempt, Exempt instrument, so there’s no tax charged on contributions, interest, or withdrawals.
• PPF also offers Section 80C benefits, allowing individuals to claim a tax deduction of up to Rs. 1.5 lakh per financial year on contributions.

Advantages and Disadvantages of EPF

Advantages of EPF:

• A safe, government-backed savings scheme with a comparatively higher interest rate.
• A safe long-term instrument for building a retirement fund for salaried individuals.
• The employer matches employee contribution. VPF allows individuals to contribute more to the fund.
• Exempt, Exempt, Exempt scheme which makes it highly tax-efficient. Allows Rs. 1.5 lakh deductions per year under Section 80C.

Disadvantages of EPF:

• EPF is only available to salaried individuals. Self-employed or retired individuals are ineligible for this scheme.
• Withdrawing funds before 5 years attracts taxes on interest earned.
• Only contributions up to Rs. 2.5 lakh per year are exempt from tax.

Advantages and Disadvantages of PPF

Advantages of PPF:

• PPF is a voluntary and safe long-term scheme backed by the government.
• All Indian citizens, including salaried and self-employed individuals, can access the PPF.
• The minimum contribution amount per year is only Rs. 500, which makes PPF quite flexible.
• PPF is also a tax-efficient Exempt, Exempt, Exempt vehicle. Account holders can also enjoy Section 80C deduction benefits with this scheme.

Disadvantages of PPF:

• A lock-in period of 15 years may be considered too long by some investors.
• The maximum amount one can invest per year is low, only Rs. 1.5 lakh.
• The interest rate offered by PPF is lower compared to EPF.
• Partial withdrawals can be made only after completing 6 years, which is also considered quite long.

Conclusion

The Employees’ Provident Fund and Public Provident Fund are government-backed savings schemes. While the EPF is designed to help employees build a retirement corpus, the PPF is a long-term savings scheme for salaried and self-employed individuals. Both these schemes encourage long-term savings. The key difference between EPF vs PPF is that the EPF is a mandatory scheme for salaried employees only, whereas the PPF is a voluntary scheme open to all Indian citizens. Both schemes are classified as EEE and offer Section 80C benefits, making them tax-efficient.