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Saturday, January 27, 2018


EPF scores over PPF as far as interest rates are concerned. But are returns the only criteria to make a wise investment decision? What about liquidity, feasible investment duration, interest credit cycle etc? We usually do not pay much heed to these equally vital criteria for massive long term wealth creation.
Let us compare two of the safest and most tax efficient government backed investing options i.e. EPF and PPF from all perspectives.

What is EPF?
Employee’s Provident Fund (EPF) is a retirement benefit scheme that’s available to all salaried employees. This fund is maintained and overseen by the Employees Provident Fund Organisation of India (EPFO). Any company with over 20 employees is required by law to register with the EPFO. This investing option helps employees save a fraction of their salary every month, to be used later in the event that one is rendered unable to work, or upon retirement.

What is PPF?
Public Provident Fund (PPF) scheme is a popular long term investment option backed by Government of India which offers safety with attractive interest rate and returns that are fully exempted from Tax. This investing option is open to every citizen of India. Investors can invest minimum Rs. 500 to maximum Rs. 1,50,000 in one financial year and can get the facilities such as loan, withdrawal and extension of account.

Similarities across EPF and PPF
1. Safety / Risk
Both EPF and PPF are government backed investing options, and are as safe as an investment can get. You are assured of your principle as well as interest.
2. Predictabilty
You can calculate the interest that you are likely to get at the end of every year with a fair degree of accuracy. Though the interest rates are subject to revision every quarter, political compulsions do not let the interest rates to be 100% market driven.
3. Interest Credit Cycle
Both investing options credit interest only once during the year i.e. at the end of the financial year.
4. Taxation Regime
Both EPF and PPF follow EEE taxation regime which means that the principle investment, interest and withdrawal are all tax free after a specified period of investment.
5. Both contribute to Section 80C with same limits
Investments in both EPF and PPF are counted for tax exemption under Section 80C with the same limits i.e. 1.5 Lacs.
6. Loans
You can get loans - both against your EPF and PPF accounts - for specific and valid reasons.
7. Single Account
You are not allowed to possess more than one active EPF or PPF accounts in India.
[Recommended Blogpost : Opening Multiple PPF Accounts in India]

Where EPF scores over PPF
1. Higher Returns
EPF returns have been significantly higher than PPF interest rates over the last few years. This trend is likely to continue, though the interest rates are likely to come down further in both the investing options.
2. Automated Disciplined Investment
EPF is an automated mechanism of contribution for a salaried employee. Hence, the investing discipline is inculcated by default. This is one of the keys of wealth generation.
3. More Liquidity in the first 5 years
EPF has more liquidity in the first 5 years. If you leave your job, say after 2 years, you have the option to withdraw your money - though it will be taxed. PPF does not provide any withdrawal option before 5 years. The liquidity situation, though, reverses after 5 years.
[Recommended Blogpost : Tax Implications in EPF Before 5 Years]
4. Pension Contribution
Your investment in EPF also leads a part of the money to be invested in a pension fund (EPS) - which comes back to you in the form of annuity / withdrawal post retirement. No such option exists in the case of PPF.
5. Equity Linked Returns
EPF contributions up to 15% are now invested in equity. The returns, are, therefore linked to equity returns to some extent. Equity is known to give much better returns if the investor can maintain disciplined investments over long term - which EPF is anyway designed for. PPF contributions do not get diverted to equity at all.
[Recommended Blogpost : Your EPF money is invested in Equity]
6. Invest much more
You can make use of Voluntary contributions to EPF (VPF) to increase your investments over and above the mandatory 12% of basic which gets automatically deducted from your salary.
[Recommended Blogpost : ]
7. Your employer also contributes
The best part of EPF is that your employer also contributes (up to a max of 12%) to your EPF account, thus speeding up wealth generation. PPF does not provide any such option.

Where PPF Scores over EPF
1. If you are not salaried / If you quit working
If you are not salaried, or you have quit working for someone - like I did after achieving Financial Freedom, or you are planning to have your own start up, or you have been shunted out of a job - then EPF anyways ceases to exist as a choice. PPF is the only choice you have.
2. More Liquidity after 5 years
EPF is illiquid until you retire or quit working or are shunted out from a job. This period could be even 30–35 years if you are new into a job, or less than a year if you are on the verge of retirement. PPF becomes partially liquid after 5 years and 100% liquid after 15 years of opening the account. You must find out which option gives you better liquidity depending on when you opened your PPF Account and how many years you are left to retirement. The more the liquidity, the better.
3. There are no pre-requisites for earning interest
Your money keeps earning interest as long as it is lying in a PPF Account, unlike EPF which stops paying you interest if you are not in a job.
4. Unlimited Investing duration
After the initial period of 15 years, you can keep getting your PPF account extended for an unlimited number of times in a slot of 5 years. On the other hand, EPF account becomes inoperative and dormant if you do not operate it for 3 years.
[Recommended Blogpost : PPF Account Extension after 15 years]

Both investing options have their own merits. EPF scores on returns and disciplined mandatory investing. PPF scores on flexibility and better liquidity in specific years. A young beginner must ensure adequate investments in both investing options. A seasoned investor should look at his/her portfolio to decide whether any more debt investments are needed.

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Manoj Arora

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