In this article, I will be telling you that How EPF is different from PPF
EPF is an employee provident fund, and PPF is a public provident fund. What is the difference between EPF and PPF? Which one you can invest in and in which you should invest. All these questions will be answered in this article.
How EPF is different from PPF
EPF: Employee provident fund or provident fund; this is for all employees who work on a salary basis in a company registered under the provident fund act. These companies mandatorily have more than 20 employees; in simple words, an organization with 20+ employees must register for the EPF scheme. Secondly, each employee with a salary of less than Rs 15000 must register for the EPF scheme.
Fewer than 20 employees can also register voluntarily. Most companies then extend it to all the employees, because it gives excellent benefits.
The three main benefits are:
- Discipline investing: Trust me, at times, we require some mandatory rules to save and invest our money; EPF gives us the same opportunity. And yes, I am a fan of disciplined investing, and that is the only way to create long-term wealth without pinching you.
- Tax Benefits: Its tax benefits are twofold; number 1 is under 80 C, which is the main clause for a tax deduction; all your yearly PF investments are deductibles, which means whatever PF investments, you make through a combination of your contribution and the contribution of your company all of that would be deductible to the limit of what is there under section 80 C which is 1.5 lacs these days. And the best thing is whatever money you will invest after deducting from the EPF account. Whatever final amount you will get on it will be tax-free.
- Risk-free Guaranteed return: EPF gives you a guaranteed return, and it’s risk-free because the government backs it. Every quarter the rate of return is decided, and in this financial year, the rate of return is 8.5%. This is the most significant difference between EPF and FD; If you put money in EPF, inflation is at 6%, giving you 8.5 % tax-free, which means all of it so that it can beat inflation by 2.5 %.
These are the reason why EPF is an excellent investment, in my opinion.
The best thing about EPF is it never reaches your bank, So it is almost like not your money, but it is still your money because you will reap the benefit of it much later when you are sitting on a lot of money.
Now let see how its calculation is done :
Suppose your basic salary is 25 k, then the EPF amount will be 12% of 25k, i.e., 3000 will be deducted from your salary, and it will be transferred to your EPF account now at the same time your employer will also be contributing the same 12% on their behalf. So overall rotal 6000 will be contributed to your EPF account every month. There will be some changes that I will tell you about now, but overall, the concept will remain the same.
So if your salary is Rs 100 and you invest 12% of it, i.e., RS 12 in your PF, but your employer also contributes Rs 12 in it, technically, your employer can say that your salary is not Rs 100, but it is Rs 112. As the employer contributes Rs, 12 overall CTC will be Rs 112 and not Rs 100.
Now let’s see how it works as. Some of the people say my monthly PPF deduction is RS 1800. It’s not 12%. Some say it’s different.
So there are three ways that a PF can get deducted.
- If your salary is less than 15000 per month, then whatever your salary is, for example, 10000, the Rs 1200 will go towards your EPF, Employer will contribute the same. That means 2400 will go towards your PF, and it will compound yearly at 8.5% year on year.
- If your salary is more than 15000 then you have two choices:
- Choice 1, which is called minimum investment, is 12% of Rs 15000, i.e., Rs 1800, so you can choose it and the company will also contribute the same amount, so every month Rs 3600 will be contributed every month to your PF account. This means again two things will happen number 1 more money on hand, which may seem reasonable. Still, if you are not investing that money regularly and wisely, that also means far less money invested towards your future, so it’s a double-edged sword. Often many people make these mistakes, especially in their early days that they keep PF on a minimum amount because they think they will get more money in hand and that can be used to fulfill their needs and desires, but then they lose the discipline of investing.
- If possible, my recommendation would be to please make 12 % only, which is option 3.
Option 3 is where you say that at a salary of more than Rs 15000 per month, instead of investing in 1800, I will fund 12% of the whole amount. The company has two choices they can either continue contributing minimum, which is 1800 r gove 12%. This is something that is decided at the time of joining. Please try to convince the companies to contribute 12% because you are also contributing 12%; that is the best way to be confident. This will be the surest way to invest regularly and invest wisely. This is broadly about EPF.
Now let’s understand the terms and conditions of withdrawal.:
- You can withdraw the money from your PF account after two months whenever you resign from the company. If that service or employment was for a duration of fewer than five years, then you have to pay a tax on it; if the service was more than five years, then you will not have to pay any tax. This is per company, not the employment period.
- The second scenario is retirement, so when you retire at the age of 60, you can withdraw the PF amount, and your amount would be 100% tax-free; these are the two withdrawal condition.
Beyond this, you can never withdraw your PF. So this is not a liquid investment, unlike mutual funds or small cases or stocks in which you can buy and sell whenever you want. EPF is more geared towards long-term investments.
It is suitable for more significant events in life like your children’s education, marriage, retirement corpus, etc.
Now the biggest problem is that in India, every individual is not employed. Even if they are used, they are in a company with more than 20 employees, so it is possible that they are not eligible for EPF.
So the government said that there are only 5% of people incorporate jobs and pay taxes. Everybody is self-employed or works in a small company or a company that is not registered with the provident fund, so they should not get the benefits. They said no, this should not happen, so that is the prime reason we have a public provident fund.
So the most significant difference is that if you are not an employee,
then you can go for PPF, which means your parent can be a PPF account holder, your children can be an account holder, or any citizen of India can be a PPF account holder.
But since it is available for everybody and it has no nuance or restrictions that you should be an employee and so on, its rate of return is less than EPF.
These days which is October 2021 PPF rate is 7.1 %, lesser than the 8.5% given by EPF. Here is how it works, you can open a PPF account through any bank or post office. Most of the national, as well as private banks, give this facility online. If you want to open a PPF account, you can quickly go to ICICI or HDFC, whichever is your bank, you can open a PPF account through it.
Every year a minimum of Rs 500 and a maximum of RS 1.5 lacs can be invested in PPF. You can invest regularly, or quarterly, or one-time lump sump annually; it doesn’t matter. The only difference is when you would be investing in getting a return for that tenure, but the rate of return is fixed. So you can make that investment whenever you have money, but you have to make that comment before how much money you would invest in what frequency.
Then the biggest is withdrawal. This is a 15-year lock-in investment product; you cannot withdraw money midway. That means this is only a good investment product for the long term; it is there for big life decisions like marriages, education, buying a home and retirement, and any other considerable planning as it is a minimum 15-year plan.
After 15 years, you can extend it to 5 years, which can be done indefinitely.
God forbid if something happens between that duration and you want to withdraw, then that is also possible, but it has many restrictions:
- The third and sixth financial year, sp the year you invest in is not counted in the financial year count of 15years which is the minimum requirement. Though you will get the interest for that year, that year will not be taken in the count of 15 years. FOr example, if you invest in October 2021, you will get interested till March 2022, but it will not be counted in your 15 years. Your First year will be calculated from April 2022. And then, it will be estimated till March 31st, 2037. SO you can take a loan on the 3rd and 6rh financial year towards your PPF. The loan will have an interest of PPF plus 2%.
- Option 2 is from 7th to 15th year; partial withdraw is possible. There are many conditions to it. On average, you can withdraw up to 50% from your PPF account after the 7th year; You can never withdraw 100% that can only happen at the end of 15 years.
So these are broadly the details of EPF vs. PPF, which is essential for you to know.
My suggestion is straightforward, if you are an employee, then there is no other investment product better than EPF from a fixed return perspective, and that should be a part of your investment.
If you are not an employee, then you should still consider PPF but for a lesser amount. So EPF is 12 % of your income; I suggest you go beyond 10% for your PPF account. Ideally, 5-10% will also do. It will keep on compounding itself, and it will continue like that.
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