Should you open a PPF account if you already have an EPF account? 

5 MinsDec 21, 2022

Among all the envisioned financial goals, retirement is among the most important ones. It’s the phase of life when your regular income (in the form of salary or business and profession) will stop, thus leaving you to depend on the investments made to meet your retirement expenses. In a country like India, which is yet developing and lacks adequate social security, making provisions for your retirement is even more important.

Should you open a PPF account if you already have an EPF account?

For retirement planning, there are galore of investment avenues, but among them, the Public Provident Fund (PPF) and Employees Provident Fund (EPF) are the popular ones.

Employees Provident Fund

EPF, as you may know, is a compulsory deduction from salary. As per the current law, both you, i.e., the employee, and the employer are required to contribute 12% each to the EPF Account. But for establishments employing less than 20 employees, sick industrial companies, or in case the establishment has accumulated losses exceeding its net worth, then the employees’ contribution is 10%.

In general cases, from your share as an employee, 12% of Basic Salary + Dearness Allowance will go entirely to Provident Fund (PF) contribution, while that of your employer would go as 8.33% into Employee’s Pension Scheme (EPS) and 3.67% into EPF. These contributions need to be deposited with the EPFO in the respective account. Furthermore, the employer bears 0.5% additional towards Employee Deposit Linked Insurance (EDLI). Additionally, certain administration costs towards EDLI and EPF are borne by the employer.

The objective here is not just to help you create a nest egg for retirement but also to offer financial support in case of the incapacitation to continue working either temporarily or permanently.

Typically, EPFO invests the corpus collected predominantly in government securities and debt instruments, up to 15% in equity and related instruments, and up to 5% in other permissible assets.

The contribution that the employee makes is entitled to a deduction (from gross total income) under Section 80C of the Income Tax Act, 1961. Besides, the interest earned on the total investment is tax-free, and the withdrawal (including partial withdrawals for specific expenses) is exempt from tax. In other words, EPF enjoys an Exempt-Exempt-Exempt (E-E-E) tax status.

Recently, the government revised the interest rate on EPF to 8.1% p.a. (calculated monthly) for the contributions made in FY 2021-22 (from 8.5% p.a. in FY 2020-21), making it the lowest rate of interest since 1977-78. Hence, you cannot solely count on the EPF Account for your retirement needs. If you are thinking of contributing more to the EPF account, keep in mind that the current tax law in this regard allows annual contributions only up to Rs. 2.50 lakh for earning tax-free interest, implying that when the annual contributions exceed Rs. 2.50 lakh, the interest earned thereon is fully taxable.

[Also Read: Five reasons why you should open a PPF account]

Public Provident Fund

This is yet another government-backed long-term small saving scheme of the Central Government framed under the PPF Act of 1968.

The PPF Account not just provides retirement security but even helps plan for other long-term financial goals such as your child’s future needs, viz., higher education and wedding expenses. The PPF Account can even be opened in your minor child’s name through a legal guardian. However, as per the PPF rules, the PPF Account cannot be held jointly. Simply put, only one PPF Account per individual is permitted.

PPF offers fixed and guaranteed returns and has a long-term maturity period. Moreover, the money in the PPF Account remains safe and yours for life. It cannot be attached by the order or decree of the court in case of any debt or liabilities, as per the PPF rulebook.

A minimum investment of Rs. 500 p.a. in a financial year is mandatory while the maximum investment p.a. is Rs. 1,50,000. Given these characteristics, PPF is one of the most popular investment avenues in India today. The favourable E-E-E tax status (just like EPF) makes investing in PPF attractive.

The contributions you make to your PPF Account are eligible for deduction of up to Rs 1.50 lakh per financial year (the aggregate limit) under Section 80C of the Income Tax Act, 1961. Moreover, the interest earned on the PPF Account is tax-free. At the end of the maturity period of 15 years, the maturity proceeds, too, are exempt from tax. Even partial withdrawals from the PPF Account (which are permitted subject to fulfilling certain conditions) are exempt from tax.

Use Axis Bank’s PPF calculator to know how much the amount will be at maturity –– the investment + interest.

The interest rate on PPF is announced by the government every quarter. It is linked to the rates on government securities and changes accordingly. If you are planning to make monthly contributions and not invest a lump sum before 31st March (end of the financial year), make sure you do so preferably before the 5th of every month, given that the interest on the PPF Account is calculated on the minimum balance in your account between the 5th and the last day of every month. In short, your PPF Account must be credited with the investment amount before the 5th of every month. Even if your PPF account is inactive, the existing amount in your account will continue earning interest until the scheme reaches maturity. Once the PPF account reaches maturity at the end of 15 years, you also have an option to simply extend the tenure by 5 years at a time until you want to close the account.

Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.