EPF vs PPF: Which is Better for Tax Savings? A Detailed Comparison
- PRITI SIRDESHMUKH
- May 5
- 12 min read
Updated: 1 day ago
Tax-saving instruments are a crucial component of personal finance planning in India, as they help individuals not only build wealth but also reduce their taxable income. Among the most popular options for tax-saving are the Employees' Provident Fund (EPF) and the Public Provident Fund (PPF). Both are government-backed schemes that offer significant tax benefits under Section 80C of the Income Tax Act, 1961, but they differ in their eligibility, contribution limits, interest rates, and other features.
The decision of whether to invest in EPF or PPF depends on various factors, such as your employment status, investment goals, and risk tolerance. EPF is specifically designed for salaried employees, while PPF is accessible to a wider audience, including self-employed individuals and those in the informal sector. Both schemes provide tax deductions on contributions, but they have different tax treatment on interest and PF withdrawals.
Table of Content
EPF vs PPF: A Quick Overview
To help you understand the key differences between EPF and PPF, here’s a quick comparison of both schemes:
Feature | EPF | PPF |
Eligibility | Primarily for salaried employees. Both employee and employer contribute to the fund. | Available to all individuals, including salaried employees, self-employed individuals, and those in the informal sector. |
Contribution Limit | Employee can contribute up to 100% of their basic salary as Voluntary Provident Fund (VPF), while the employer contributes 12% of the basic salary. | Maximum contribution is ₹1.5 lakh per year, with a minimum contribution of ₹500 annually to keep the account active. |
Interest Rate | The interest rate is 8.25% per annum (subject to change). | The interest rate is 7.1% per annum (subject to change). Interest is compounded annually but credited at the end of the financial year. |
Tax Benefits | Contributions up to ₹1.5 lakh are eligible for tax deductions under Section 80C. Interest earned on amounts exceeding ₹2.5 lakh is taxable. | Contributions up to ₹1.5 lakh are eligible for tax deductions under Section 80C. Interest earned and withdrawals are tax-free under the Exempt-Exempt-Exempt (EEE) status. |
Lock-in Period | Funds can be withdrawn upon retirement or resignation, subject to conditions. | PPF has a 15-year lock-in period, but partial withdrawals are allowed after the 6th year. |
Returns | Provides stable, tax-free returns, making it a popular option for retirement savings. | Offers tax-free returns and is considered safer than market-linked investments. The returns are lower than EPF, but the EEE status makes it attractive for long-term savings. |
This quick overview highlights the fundamental differences between EPF and PPF, focusing on who can invest, the contribution limits, tax benefits, and interest rates. Let’s now dive deeper into each of these aspects.
EPF: Eligibility, Contribution, and Tax Benefits
The Employees' Provident Fund (EPF) is a mandatory retirement savings scheme for salaried individuals working in India. It is a government-backed program designed to ensure that employees save for their post-retirement life. Here’s a closer look at EPF:
Eligibility
EPF is primarily meant for salaried employees working in establishments with more than 20 employees. Both the employee and the employer contribute a certain percentage of the employee's basic salary to the EPF account. The employee’s contribution is 12% of their basic salary, while the employer contributes an equal amount, subject to certain conditions.
Contribution
Employee Contribution: Employees can choose to contribute more than the mandated 12% of their salary through Voluntary Provident Fund (VPF). There is no upper limit on VPF contributions, but the employer is not obligated to match contributions beyond the 12% statutory limit.
Employer Contribution: Employers contribute 12% of the employee’s basic salary and dearness allowance (DA) towards EPF. This contribution is tax-free, up to a certain limit.
Tax Benefits
Employee contributions to EPF are eligible for tax deductions under Section 80C of the Income Tax Act, 1961, up to ₹1.5 lakh per year.
The interest earned on EPF contributions is tax-free if the balance in the account does not exceed ₹2.5 lakh in a financial year. However, any interest earned on contributions above this limit is taxable.
Employer contributions are also tax-free, and the total PF contributions and NPS (National Pension Scheme) combined must not exceed ₹7.5 lakh per year.
The tax benefits make EPF a very attractive option for salaried individuals, especially those seeking to save for retirement with guaranteed returns.
PPF: Eligibility, Contribution, and Tax Benefits
The Public Provident Fund (PPF) is a popular long-term investment scheme available to all Indian citizens. It is a government-backed scheme that offers excellent tax benefits and is ideal for individuals seeking a safe investment option for retirement or long-term savings.
Eligibility
Unlike EPF, PPF is available to everyone, including salaried employees, self-employed individuals, and even minors. Non-resident Indians (NRIs) are not eligible to open PPF accounts, though they can continue with an existing PPF account if they return to India.
Contribution
Maximum Contribution: The maximum contribution to a PPF account is ₹1.5 lakh per year. This is the maximum amount that qualifies for tax deductions under Section 80C of the Income Tax Act.
Minimum Contribution: The minimum contribution is ₹500 annually, and it must be done in a lump sum or in instalments over the year to keep the account active.
Tax Benefits
Tax Deductions: Contributions up to ₹1.5 lakh per year are eligible for tax deductions under Section 80C.
Tax-Free Interest: The interest earned on PPF is entirely tax-free, making it an attractive option for long-term investors.
Tax-Free Maturity Amount: The entire maturity amount, including principal and interest, is also tax-free under the Exempt-Exempt-Exempt (EEE) status, which is one of the main advantages of PPF over other schemes like EPF.
PPF is a safer, tax-efficient option for those looking for long-term savings with no tax liabilities at maturity.
Interest Rates: EPF vs PPF
When comparing EPF and PPF, one of the most important factors to consider is the interest rate offered by both schemes, as this directly impacts your long-term savings.
EPF Interest Rate
The interest rate for EPF is currently 8.25% per annum. While it is slightly higher than PPF, the rate can vary, and it is subject to revision by the government each year.
The interest is compounded annually and credited to the EPF account at the end of the financial year.
PPF Interest Rate
PPF offers an interest rate of 7.1% per annum, which is slightly lower than EPF. However, the tax-free nature of the interest makes it an attractive long-term investment.
The interest is compounded annually and credited at the end of the financial year, similar to EPF.
While EPF offers a higher interest rate, the tax-free interest and the long lock-in period of PPF make it a more appealing option for those who prioritize tax savings and long-term security.
Lock-in Period: How Long Is Your Money Locked In?
The lock-in period is a crucial consideration when choosing between EPF and PPF. This period determines how long your invested money is unavailable for withdrawal, influencing your liquidity and financial planning.
EPF Lock-in Period
The lock-in period for EPF is generally tied to the employee's retirement or resignation. While the employee can withdraw their accumulated EPF balance after leaving the job, specific conditions apply, such as:
The employee must have been in continuous service for at least five years to avoid tax on employer contributions and interest.
If the employee withdraws the EPF balance before five years, the employer’s contribution and the interest on it will be subject to tax.
EPF is designed as a retirement savings tool, and its lock-in period is intended to encourage long-term saving. However, you can transfer your EPF account to your new employer if you change jobs, which keeps your funds intact without triggering any tax penalties.
PPF Lock-in Period
PPF has a fixed lock-in period of 15 years, which is relatively long compared to EPF. However, it offers some flexibility:
After the 6th year, partial withdrawals are allowed, but they are subject to certain conditions.
The full amount can only be withdrawn after the 15-year term ends. Before that, you can extend the account in blocks of five years, allowing it to continue earning interest and retaining its tax benefits.
While the 15-year lock-in may seem restrictive, it is ideal for long-term investors, particularly those saving for retirement. The option for partial withdrawals after the 6th year offers some liquidity during emergencies.
Tax Benefits in Detail
Both EPF and PPF offer excellent tax benefits, but they differ in how those benefits are applied. Let's look at the tax advantages each scheme offers.
Tax Benefits Under EPF
Employee Contribution: Contributions made to EPF are eligible for tax deductions under Section 80C of the Income Tax Act, 1961, up to ₹1.5 lakh per year.
Employer Contribution: The employer’s contribution (12% of basic salary) is tax-free, but the total combined PF and NPS contributions must not exceed ₹7.5 lakh per year to qualify for tax exemptions.
Interest: The interest earned on the employee’s contribution to EPF is tax-free up to ₹2.5 lakh per year. However, any interest earned on contributions exceeding ₹2.5 lakh is taxable.
Withdrawal Tax: If EPF is withdrawn before five years of continuous service, the entire accumulated amount, including employer contributions and interest, is subject to tax.
Tax Benefits Under PPF
Contribution Deduction: Contributions made to a PPF account are eligible for tax deductions under Section 80C up to ₹1.5 lakh per year. This makes it a powerful tax-saving instrument for individuals looking to reduce their taxable income.
Tax-Free Interest: The interest earned on a PPF account is entirely tax-free. This includes both interest on principal contributions and any interest accumulated over the years.
Tax-Free Maturity Amount: The full maturity amount, including both the principal and the interest, is completely tax-free, thanks to its Exempt-Exempt-Exempt (EEE) status.
PPF offers a more tax-efficient solution compared to EPF, especially since both the interest earned and the withdrawal are tax-free under the EEE regime.
How EPF and PPF Fit into the New Tax Regime
The New Tax Regime introduced in FY 2020-21 offers lower tax rates but removes several exemptions and deductions, including the deduction for contributions made to EPF and PPF under Section 80C.
EPF and the New Tax Regime
Under the new tax regime, you cannot claim tax deductions for EPF contributions, as all deductions under Section 80C are eliminated. However, the interest earned on EPF contributions continues to be tax-free within the ₹2.5 lakh limit, and withdrawals remain subject to the tax rules mentioned earlier.
PPF and the New Tax Regime
Similar to EPF, PPF contributions do not qualify for tax deductions under the new tax regime. However, since PPF offers tax-free interest and withdrawals under the EEE scheme, it remains an attractive option for long-term tax savings, even in the new regime. PPF's tax-free interest and maturity benefits continue to be a major draw, particularly for those who choose to stick with the new tax structure.
Maximizing Your Tax Savings with EPF and PPF
To optimize your tax savings, consider the following strategies:
Maximizing EPF Contributions
Voluntary Provident Fund (VPF): Employees can increase their contributions to EPF beyond the mandatory 12% limit by opting for VPF. These contributions will still qualify for tax deductions under Section 80C, up to ₹1.5 lakh.
Tax-Free Interest: Ensure your EPF balance does not exceed ₹2.5 lakh in a financial year to maximize tax-free interest. If you are nearing this limit, consider contributing to other tax-saving instruments like PPF.
Maximizing PPF Contributions
Lump-Sum Contributions: Make a lump sum deposit of ₹1.5 lakh at the beginning of the financial year to maximize your tax deductions and interest accruals. Since PPF interest is calculated monthly but credited at the end of the year, early deposits will earn the maximum benefit.
Monthly Contributions: Alternatively, contribute monthly to ensure that you stay within the ₹1.5 lakh limit while benefiting from compounded growth.
By contributing strategically to both EPF and PPF, you can not only save taxes but also build a substantial retirement corpus with guaranteed returns.
Choosing Between EPF and PPF: Which Is Better for You?
The choice between EPF and PPF largely depends on your financial goals and employment status.
EPF is ideal for salaried individuals, particularly those who are looking for an employer-backed retirement savings scheme. If you are employed in the formal sector, EPF offers you the benefit of both employer contributions and stable returns with tax-free interest up to a certain limit.
PPF, on the other hand, is more suitable for individuals looking for a long-term, flexible investment option that offers tax-free interest and maturity benefits. It’s a great option for self-employed individuals and those in the informal sector who do not have access to EPF.
If you are a salaried employee, you may choose to invest in both schemes—EPF for retirement savings and PPF for long-term tax-free wealth accumulation.
Conclusion
In conclusion, both EPF and PPF are excellent tax-saving tools, each with its own set of advantages. EPF is ideal for salaried employees looking for a reliable, employer-supported retirement savings option with tax benefits. PPF, however, is more flexible and tax-efficient, especially for those who want a long-term, secure investment with tax-free returns. The decision ultimately depends on your employment status, financial goals, and investment horizon.
Given the recent changes in the tax regime, it’s important to assess your own financial situation and make an informed decision that aligns with your long-term goals. Both EPF and PPF continue to be strong contenders for tax-saving, and with the right strategy, you can maximize your savings and build a secure future.
FAQs
What is the maximum contribution limit for EPF and PPF?
EPF: The maximum contribution limit for EPF is based on the employee’s basic salary and dearness allowance. While the mandatory employer contribution is 12% of the basic salary, employees can contribute more through Voluntary Provident Fund (VPF), but the employer does not match this excess contribution.
PPF: The maximum contribution to PPF is ₹1.5 lakh per financial year. This limit qualifies for tax deductions under Section 80C. There is no upper limit for the interest earned on PPF.
Is the interest earned on EPF tax-free?
Yes, the interest earned on EPF is tax-free up to a limit of ₹2.5 lakh per year. However, if your combined EPF and NPS contributions exceed ₹7.5 lakh, the interest earned on contributions above ₹2.5 lakh will be taxable.
How does the lock-in period for EPF and PPF compare?
EPF: The lock-in period for EPF is typically tied to the employee’s employment. You can withdraw your EPF balance after retirement or resignation, provided certain conditions are met. If you change jobs, you can transfer your EPF balance to the new employer.
PPF: PPF has a fixed lock-in period of 15 years. However, partial withdrawals are allowed from the 6th year onwards, subject to certain conditions. Full maturity benefits are available after 15 years, though you can extend the term in blocks of five years.
Can I withdraw from PPF before 15 years?
PPF has a lock-in period of 15 years, but partial withdrawals are allowed after the 6th year of account opening. The amount that can be withdrawn is limited, and the rules may vary depending on the number of years the account has been active. Full withdrawals are only allowed once the 15-year term is complete.
What happens to my EPF balance if I change jobs?
If you change your job, you can transfer your EPF balance to your new employer’s EPF account. This ensures that your EPF account remains active, and the interest on your accumulated savings continues. Alternatively, you can withdraw the amount, but this may attract tax liabilities depending on how long you’ve worked with the employer.
Can I claim tax deductions on both EPF and PPF contributions in the same year?
Yes, you can claim tax deductions on both EPF and PPF contributions in the same year under Section 80C, as long as the total contribution does not exceed ₹1.5 lakh. For EPF, the employee contribution qualifies for tax deduction, and for PPF, the total contribution (including interest) is also eligible for tax-saving under Section 80C.
What are the tax implications of early withdrawal from EPF?
If EPF is withdrawn before five years of continuous service, both the employee and employer contributions, along with interest earned on those, will be subject to tax. The tax will be deducted at the time of withdrawal. However, if you complete five years of continuous service, the entire EPF balance, including employer contributions and interest, remains tax-free.
Are PPF investments exempt from income tax?
Yes, PPF offers Exempt-Exempt-Exempt (EEE) status. This means that contributions to the PPF account are eligible for tax deductions under Section 80C, the interest earned is tax-free, and the maturity amount (including interest) is also tax-free. This makes PPF an attractive option for long-term tax savings.
How do the interest rates of EPF and PPF affect my savings?
EPF: The EPF offers a fixed interest rate of 8.25% per annum (as of the latest update), which is attractive for long-term savings. However, the rate may change periodically, as it is determined by the government.
PPF: The PPF offers a lower interest rate of 7.1% per annum, but it is still higher than most regular savings accounts. The tax-free interest and maturity amount make PPF an attractive option for long-term, stable returns.
Which is better for long-term savings, EPF or PPF?
Both EPF and PPF are great for long-term savings, but they serve different purposes:
EPF is more suited for salaried individuals who want a stable retirement fund with contributions from both the employer and employee.
PPF, on the other hand, is more flexible and accessible to all, including self-employed individuals. It offers tax-free interest and maturity amounts, making it ideal for long-term tax-efficient wealth creation.
How do EPF and PPF fit into the new tax regime for FY 2025-26?
Under the new tax regime, individuals can no longer claim deductions for EPF or PPF contributions under Section 80C. However, both schemes remain attractive due to their tax-free interest and maturity benefits. For EPF, the tax-free interest is still applicable up to ₹2.5 lakh per year, and PPF continues to offer tax-free interest and maturity benefits under its EEE status.
Can I enhance my EPF contribution beyond the mandatory limit?
Yes, employees can enhance their EPF contribution through Voluntary Provident Fund (VPF). While the employer's contribution is limited to 12% of the basic salary, employees can voluntarily contribute up to 100% of their basic salary. These voluntary contributions also qualify for tax deductions under Section 80C.
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