There are several types of provident funds, which are used by organisations and individuals to derive retirement benefits. Some of the prominent funds are Public Provident Fund (PPF), Employees’ Provident Fund (EPF) and General Provident Fund (GPF).
Here are the basic differences and benefits of the three provident funds:
Public Provident Fund (PPF)
As the name indicates, this fund is available for the general public – be it a serviceman or a businessman or a professional or self-employed person. Any person having a PAN may open a PPF account for self and his/her minor children and deposit up to Rs 1.5 lakh in a financial year taking together the contributions made in all the accounts opened against the PAN. The maturity period of a PPF account is 15 years, which may be extended on maturity for a block of 5 years any number of times.
The rate of interest on PPF contributions is declared by the government on a quarterly basis and it is generally kept higher than the prevailing fixed deposit (FD) rates.
With a sovereign guarantee, the contributions in PPF are totally safe and the balance in PPF account cannot be attached through any court order to pay off the liabilities of an account holder.
On maturity, an account holder may withdraw the entire amount in lump sum or may extend the account for another 5 years with or without contribution.
A PPF account holder may take a loan against the deposit from the third year to sixth year and partial withdrawals are allowed after the completion of the sixth year.
The contributions to PPF accounts are eligible for tax benefits u/s 80C of the Income Tax Act and the interests and maturity amounts are also tax-free.
Employees’ Provident Fund (EPF)
As the name suggests, the benefits of EPF are available to employees of an organisation. Private sector companies having more than 20 employees need to adopt EPF mandatorily to provide retirement benefits to employees having a basic salary of up to Rs 15,000 per month. It is optional for the employees having a higher basic salary.
Under EPF, an employer contributes 12 per cent of his/her basic salary and the employer also makes a matching contribution. An employee has the option to enhance the contribution level beyond 12 per cent.
There are three benefits of EPF – lump sum PF withdrawal at the time of retirement, regular pension under Employees’ Pension Scheme (EPS) and insurance benefit under Employees’ Deposit Linked Insurance (EDLI).
While the employee’s entire 12 per cent contribution goes to EPF, out of the employer’s 12 per cent contribution, 8.33 per cent goes to EPS and the remaining 3.67 per cent goes to EDLI.
So, apart from lump sum benefits at the time of retirement, employees also get regular pension after retirement and insurance cover during service.
Partial withdrawal from EPF is also allowed for specific purposes – like house building, medical treatment, marriage of son and/or daughter, etc.
Rate of interest is declared by the Employees’ Provident Fund Organisation (EPFO) every year after consulting with the government. The rate is currently higher than the interest rates offered on PPF and GPF.
Employer’s entire matching contribution up to 12 per cent of the basic (Basic+DA) salary is tax free. Additional contributions by the employer, if any, are added to the salary income of the employee for tax calculations. Contributions by the employees are eligible for tax benefits u/s 80C of the Income Tax Act.
Earlier, the interest and withdrawals were totally tax free. However, from the last financial year, interest received on employees’ contributions above Rs 2.5 lakh has become taxable.
General Provident Fund (GPF)
GPF is available to government employees who joined their services on or before January 31, 2003 and are getting pension benefits under the Old Pension Scheme (OPS) for accumulating their retirement corpus. Eligible government employees may contribute minimum 6 per cent of their emoluments and maximum up to 100 per cent of their emoluments.
Unlike EPF, there is no contribution from the government and only the employees contribute to GPF. So, GPF is more like PPF. But the differences are that GPF is not available to the general public and the investment limit has now been set at Rs 5 lakh in a financial year.
Being a government fund, investment in GPF is totally safe and the rate of interest offered is more than the prevailing FD rates.
Money accumulated in GPF may be withdrawn as a lump sum at the time of retirement. Partial withdrawal options are there for specific purposes – like house building, medical treatment, marriage of son and/or daughter, etc.
The contributions to GPF are eligible for tax benefits u/s 80C of the Income Tax Act.
Earlier, the entire interest earned and the maturity was tax-free. However, from the last financial year, interest on contribution over Rs 5 lakh in a financial year was made taxable. Now, contributions above Rs 5 lakh are disallowed.