By Aryan Bharti
Introduction
At least once, one does think of taking an exposure towards equity either directly through stocks or via mutual funds. However, generally stock market and mutual funds are considered to carry a amount of higher risk.
Indian investors prefer stable returns and when we look at the most prominent investment opportunities for long-term and tax benefits, there are two default choices – Public Provident Fund ( PPF) and a Provident Fund ( PF).
A Public Provident Fund (PPF) is a tax-free savings scheme governed by the Government of India. It is a long-term investment scheme with a lock-in period of 15 years. People can begin to invest in a PPF with a minimum amount of INR 500 p.a. The interest rate is set and paid by the government.
A provident fund (PF) is a mandatory retirement savings scheme administered by the Indian government. The Provident Fund scheme is a retirement benefit scheme from which benefits are withdrawn in a lump-sum after retirement. In organisations where there are more than 20 employees, it is mandatory for every employee to have a provident fund.
An employee as well as his employer makes a contribution towards the provident fund. The employee makes this contribution from a portion of his salary. The money in the fund is then retained and managed by the government and ultimately withdrawn by the employee.
In order to make a quick comparison between PPF & PF, it is important to first understand the significance and meaning of these accounts.
What Is A Public Provident Fund?
A Public Provident Fund scheme is one of the most popular investments in India. This is no surprise as it provides tax deductions, and is a relatively safe investment tool backed by the government.
PPF is a government-supported long-term savings scheme initially started by the Central Government, framed under the PPF Act of 1968.
It is the one of the financial investment options to secure an ample sum of money for retirement.
Features of a PPF account
- The tenure of a PPF account is for 15 years. It can further be extended by a block of 5 years.
- The interest rate on a PPF account gets compounded annually. A PPF tends to give better returns than a fixed deposit at a bank. The Current interest rate in 2021 for a PPF Account is 7.1%.
- The minimum annual deposit is of Rs. 500 and the maximum of Rs. 1.5 Lakh. If the annual investment exceeds the maximum deposit no interest will be earned on the excess amount.
- A PPF has a low level of risk and is one of the safest forms of investment as it is regulated by the central government.
- The PPF also offers loans against the account.
- Each individual can open only a single PPF account in his name.
- Nomination: You can add a nominee to your PPF account at any time during its tenure or at the time of opening the account.
PPF Interest Rate
As of 2021, the PPF interest rate has been reduced from 7.9% to 7.1 % and it is compounded on an annual basis.
Interest rate in 2018–19
| Period | Interest Rate |
| April 2018 – September 2018 | 7.6% |
| October 2018 – March 2019 | 8.0% |
Interest rate in 2020–21
| Period | Interest Rate |
| April 2020 – March 2021 | 7.1% |
The interest is paid and the interest rate on the PPF account is set by the Finance Ministry on a yearly basis.
Eligibility To Open A PPF Account
Every Indian citizen is eligible to open a PPF account. There is no age limit to open an account. Minors too can have a PPF account.
A person can open a single PPF account in his name.
Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) are not allowed to open a PPF account.
How To Open A PPF Account?
Opening a PPF account is very simple. Anyone with an active bank account can open it at post offices, authorized Banks or through an online mode.
For opening an account offline, you need to visit your nearest post office or Bank. You would then need to prepare various documents needed to open a PPF account.
You would need to ensure that the following steps are taken :
- The Application Form needs to be submitted.
- ID proofs such as Aadhar card, PAN card, passport, voter ID, and ration card are required while opening an account.
- You need to submit the Current Address and signature proof.
The process to apply online is much easier. You need to visit the official website of the bank. While visiting the website you need to ensure that the bank has a facility available. Once you submit your KYC documents, you can go ahead and open an account.
PPF Withdrawal
You can withdraw the entire amount only after the completion of its 15 year tenure. However, if you want to withdraw the PPF before its maturity period, it can be authorized from the 6th year onwards. This withdrawal is made as per circumstances foreseen by the rules of the PFF.
You can take a loan against your PPF account after it has been active for three years. The maximum amount allowed to be taken as a loan is capped at 25% of the closing balance of the previous year.
Now that we have understood the features of a PPF, let us look at the features of a Provident Fund so that we can do a quick comparison between PPF & PF.
What Is A Provident Fund?
Provident Fund is a Government-backed retirement saving scheme. Its purpose is to provide employees with lump sum payments at the time of retirement or at the end of their retirement period.
An employee gives a portion of his monthly basic salary to the provident fund, and the employer should make a contribution on behalf of the employee. This can be withdrawn after you retire or leave the organization. You can also add a nominee.
Any organization with more than 20 employees has to cut a certain amount from their basic salary every month to contribute towards the Provident Fund. This is compulsory for employees with a salary of less than Rs 15,000. For employees with a salary of more than Rs 15,000 it is not mandatory.
This scheme is proposed by the Government for employees because it provides long-term saving plans which make it easy to secure an ample sum of money for retirement.
How Does A PF Account Work ?
For salary less than Rs 15,000 – a minimum of 12% of basic salary is deducted from an employee on a monthly basis. The organization also contributes 12% which gets divided into 3.67 for EPF 8.33% EPS with an extra contribution 0.5% for each EDLI (Employee Deposit Linked Insurance Scheme) which is an insurance cover and EPF Admin.
| Contributions | Employer’s contribution | Employee’s contribution |
| EPF | 3.67% | 12% |
| EPS | 8.33% | Nil |
| EDLI | 0.5% | Nil |
For the basic salary more than 15000 there are two options –
- Minimum EPF – 12% of only Rs 15000 will get deducted even if the basic salary is high.
- Full EPF – 12% of complete basic salary will be deducted.
What Are The Benefits Of A PF?
- If we were to make a quick comparison between PPF & PF, PFs always give a higher interest rate of around 8-9%, which gets reviewed every year.
- The returns are exempted from being taxed. This improves efficiency for savings.
- Provident Fund carries very little risk.
- Apart from the pension you also get an insurance cover EDLI (Employees Deposit Linked Insurance Scheme).
- PF accounts can be accessed universally, which means even after you move to your a new job, you don’t have to create a new PF account. Your new employer can continue with the PF account which is already in use.
- On withdrawal of funds from a PF account, there will be no tax exemption within the first 5 years.
A Quick Comparison Between PPF & PF – Are the Tax Benefits the same ?
An employee can get tax benefits for contributing to PF accounts. If you contribute towards an employee provident fund account for a period of 5 years, you will escape tax deduction on the amount you have contributed.
However, if the duration of your EPF contribution is less than 5 years and you withdraw your PF contribution before it completes 5 years, income tax will be deducted at source.
In the Budget of 2021, the Finance Minister announced that interest on employee contributions of over Rs 2.5 lakh per annum to the provident fund would be taxed from 1st April onwards. Annual contributions up to Rs 2.5 lakh have been kept as the deposit limit for which interest is tax-exempt.
A Quick Comparison Between PPF & PF – What is the interest rate ?
Provident Funds always give High-interest rate around 8-9% which gets reviewed every year. The rate of interest for the EPF scheme is reviewed on a yearly basis. The rate of interest is dependent on the market conditions and is vetted by the finance ministry.
| Financial Year | Rate of interest per annum p.a. |
| 2019-2020 | 8.5% |
| 2018-2019 | 8.65% |
| 2017-2018 | 8.55% |
How Can You Withdraw Funds From A PF?
- You can only withdraw 100% of your Provident Fund after retirement (58 yrs).
- You can also withdraw 90% at 57 yrs.
- Partial withdraw for medical emergencies, home loan, marriage is possible only after 5 years of opening the account. However, this is only applicable for 50% of the funds.
- You can also withdraw 100% of your Provident Fund after you resign your current job.
Concluding Remarks: A Quick Comparison between PPF & PF
Now that we have understood different aspects of a provident fund and a public provident fund, let us make a quick comparison from PPF to PF so that we know in a snapshot how one differs from the other.
This article is authored by Aryan Bharti. He is an active blogger and writes about topics such as financial planning, investments and wealth management.
If you want to understand the more about investments do read the article on – How To Do A Quick Fundamental Analysis Of A Stock.
