I have talked about Public Provident Funds and how they are a safe form of investment. Salaried people would have also heard about EPF or Employees Provident Fund. Many have doubts about the difference between the two – whether both are necessary or can we have just one. Lets see what and how each scheme works and how they are different or similar to each other.
Provident Funds
Provident funds are Retirement Savings Scheme. Depending on the scheme you have the choice to regularly deposit money in your provident fund account. There are three advantages:
- money deposited in this is exempted for income tax under section 80C.
- any interest or returns you earn during the accumulation phase is also exempted from income tax
- during withdrawal (after maturity) the money you get is also exempted from income tax.
This is what is referred to as EEE (Exempt-Exempt-Exempt) in income tax jargon. Most long-term savings or investments come under EEE. Both EPF and PPF enjoy the EEE status, so any money you put in helps you save taxes and any money you earn & take out is also tax-free.
Employee Provident Fund
This is a retirement benefit scheme available to salaried employees. Every month 12% of your basic salary + dearness allowance is deposited by the company into a EPF account held in your name. The company also needs to make an equal contribution to your account.
The employee can choose to contribute more than 12% of his salary (say 15% or 18%) if the scheme allows, but the employer is not obligated to match beyond the minimum 12%.
Some of the features:
- Currently the rate of interest you earn on the money you have in your account is 8.75%. This rate is periodically adjusted for the entire financial year.
- If you urgently require some money, you can take a loan against your EPF.
- Premature withdrawal is not allowed unless there is a strong case for it – like buying a plot or house, education, wedding, medical treatment, etc. Each reason has specific rules and limits for withdrawal.
- When you switch jobs, you can transfer the account to your new employer. This makes sure your compounded interest isn’t lost by closing and opening new account.
- Withdrawal immediately after you quit your job is illegal, unless you couldn’t get a job for over 2 months.
The best part I personally like about EPF: You don’t even get to see the money deposited in your salary account, which means you can never spend this to buy anything unwanted. Many people fail to understand the amount of money they need at retirement. This is why the government has set up the rules so that your money automatically gets saved and taken care of. Don’t you love it when someone else takes care of your money problems?
Public Provident Fund
The Public Provident Fund is a retirement scheme run by the central government. Unlike EPF, any citizen can open a PPF account in his name. You can have your own business, be a consultant, work in a small company (which doesn’t come under EPF laws), even open a PPF account under your children’s names.
Anyone can open PPF account in any nationalised banks or post office branches. However each person can have only one PPF account in his name – across all banks and post offices. You can’t open an account in SBI and then goto ICICI bank to create another account – that is illegal.
You can deposit a maximum of Rs.1,00,000 per financial year in your PPF account and a minimum of Rs.500 is required every year to keep the account active. Your account is locked in for a period of 15 years, but you can extend it in blocks of 5 years every time.
Like EPF, you can take a loan against your PPF account, but only from the 3rd year of your account. If you open an account in this financial year (2014-15), you can take a loan from 2016-17. That too only up to a maximum of 25% of your balance at the end of first year. You can make withdrawals, but there are also lot of rules and limitations on how much you can withdraw and from which year.
I would suggest to never touch your money in Provident Funds as the compounded effect would be phenomenal when you get your check when you retire. PPF accounts earn interest at the rate of 8.7% (compounded annually) as of now and this rate is also updated occasionally. But the best part of PPF is, if you are bankrupt or involved in some legal dispute, a court cannot attach or ask for the money you have in your PPF account. That money is yours whatever happens.
Safety vs Returns
Since provident funds are run by and has the backing of the Government of India, it is the safest form of savings you can do for your retirement. Of course with higher safety your potential for growth is also reduced. If a person just uses provident funds for his retirement, he would be losing money with the current prevailing inflation rate. There needs to be a balance between safe investments and high return investments for better growth.