Diffrence between EPF vs VPF vs PPF

By | November 18, 2014

There are three (3) types of provident fund amounts that are associated with a salaried person.

They are:
Employer Provident Fund or Provident Fund (EPF): Employers in India with an employee base of 20 or more employees are required to comply with the Employee provident fund schemes run by government. This scheme’s aim is to contribute some portion (generally 12%) of your monthly salary towards your retirement benefits.
A small part of it (a chunk from 12% itself) is also contributed towards pension scheme.

Provident fund as shown on Cost to company letter
Provident fund as shown on Cost to company letter
This is the amount which your company contributes to YOUR PF account from their own pocket. Hence, it is a cost for them which they are incurring on you. So, it qualifies to be part of CTC. The amount of PF that is mentioned on your CTC letter is actually employer contributed PF.

This amount is tax free for you. It is NOT included in the yearly tax rebate amount of INR 1 lakh for investments.

Employee Provident Fund (VPF) : Hmm..So, you understood the employer PF? If yes, then this one should not be difficult to digest.
Government PF scheme also mandates that you as an employee should also contribute to YOUR PF account monthly i.e. an equal portion (generally 12%) or any other amount that you want to.This is also known as Voluntary Provident Fund (VPF).
The amount that you see on your pay slip as deduction is actually this amount and NOT the PF (Employer provident fund). The employer PF is neither added to your income nor deducted. Hence, it is NOT reflected in your pay slip but is shown on CTC letter.

Since VPF is taken out of your pocket, it is shown on the deductions side of your salary slip. This is also the reason behind NOT showing VPF explicitly in your CTC letter. VPF is an expense for you and NOT your employer.

Provident fund as shown on Salary Slip
Provident fund as shown on Salary Slip
This amount is considered as an investment by you and forms part of the yearly tax rebate investments (currently capped at 1 lakh per year).

Public Provident Fund (PPF): This is NOT related to your employer at all. It is basically a personal provident fund account that you can open with any of the designated banks like SBI etc.. It is like a savings account that you can open any time. Also, there is NO obligation to open it. If you want, you can open and put money in it.
This account is again a long term investment account and helps you save income tax as the amount credited to this account is allowed to be included in your tax rebate investments (Currently capped at INR 1.5 lakh per year). Although, you can have total investments of 1 Lakh for saving tax, the PPF account’s terms and conditions only allow maximum of INR 1,50,000 to be deposited in a single financial year.

Please note that the amount in this account is neither mentioned on CTC letter nor on your pay slip.

But yes, if you declared it in your company to save tax, it will be mentioned on FORM 16 (Salary and tax calculation form issued by your employer).

I hope I have answered all the questions regarding the above amounts with respect to CTC, salary slip and income tax rebate.
Please write in your questions and comments in comments section. I will be happy to help you with answers.

What are EPF, VPF and PPF?

Employee Provident Fund – It is mandatory for salaried people working in organizations registered under the Employees’ Provident fund Organization (EPFO) to contribute either 12% of their Basic +Dearness Allowance or Rs.780 towards EPF. There is more, the employee alone doesn’t contribute 12% of their salary, the employer as well contributes the same amount. Participation in EPF is mandatory for Employers who have more than 20 workers and for workers whose basic salary is more than Rs. 6,291. Also, the saved amount earns interest and is also eligible for tax deduction. The most attractive feature about EPF is that it is risk free and could be chosen as an investment tool to be used after retirement.

Voluntary Provident Fund – As the name suggests, the employee can voluntarily contribute any percentage of his salary to the Provident fund account. This contribution is besides the mandatory 12% contribution. The employer however is not obligated to contribute any amount towards VPF. An employee can contribute 100% of his basic and DA. Interest offered would be the same as EPF and this amount would be credited to EPF account only as there is no separate account for VPF. VPF again is meant for salaried individuals only.

Personal Provident Fund – It is a statutory scheme initiated by the Central Government with the special objective of providing old age financial security to the unorganized sector/ self employed (non-salaried employees). Everyone can contribute to PPF account and get risk free and assured returns.

Which one is better?
Now that we have understood what PPF, EPF and VPF are. We need to find out, which is the one that stands out among all. A one on one comparison (between the 3 products) using factors like Eligibility, contribution, tax benefits, returns, withdrawal facility etc. would help us understand the pros and cons of each of them. This comparison would come handy while taking a decision regarding these products. Let us see how:

Eligibility criteria:
People from unorganized sector including non-salaried employees are eligible to open a PPF account either at bank or Post Office and earn the same assured high returns. While VPF and EPF scheme can only be availed by salaried individuals.  VPF subscribers can contribute any amount over and above the necessary 12% contributed in EPF account.

Besides EPF, both in VPF and PPF the contribution is voluntary. Only salaried individuals can sign up for VPF whereas PPF is for both salaried and non salaried individuals. An employee who wants to increase his retirement savings can tell the employer to deduct a certain percentage which is in addition to the necessary 12% of basic pay and dearness allowance that goes towards EPF account. An employee can contribute around 100% of basic pay and dearness allowance towards VPF account (part of EPF). For VPF, the employer is not bound to contribute any amount.

Talking about the magnitude of contribution in each of the schemes, PPF account has an upper limit of Rs.1 lakh per year, whereas there is no such limit in case of VPF contribution. Also, one can contribute either a lump sum amount in the PPF account or distribute the investment amount into periodic payments.

Presently, PPF account is offering an interest rate of 8.7%. However, since the interest rate on PPF is linked to 10-year government bond yields, it may change depending on the market but as government bonds are generally among the least risky financial products, the returns generally remain favorable. On the other hand, interest rate on VPF is not linked to G-bond yield and is the same as offered on EPF account. For the financial year, 2013-2014, EPF has fixed the rate at 8.75% which is only slightly greater than PPF rate.

Tax Benefits:
Maturity proceeds from EPF/VPF are tax exempted only if the employee has serviced the company for a continuous period of 5+ years. If he/she quits before completing 5 years, then the maturity returns would attract some tax. PPF returns on the other hand are tax free.

Investment Period:
VPF: Amount is payable at the time of retirement or resignation. Or, it can also be transferred from one employer to the other if one switches jobs. On death, the accumulated balance is paid to the legal heir.

PPF: Amount can be withdrawn only on maturity, that is, after 15 years of the end of the financial year in which the product gets associated with a person.

Withdrawal facility:
In case of the PPF account that is to be maintained for a minimum of 15 years, only partial withdrawal is allowed subject to some terms and conditions The account can further be extended for another 5 years. However, the money from a VPF account can be fully and conveniently withdrawn. Further, if withdrawal from the VPF account happens prior to completing 5 years of service with the employer, then that amount would be taxed.

Loan facility:
For EPF/VPF, one can apply for a loan and also withdraw their complete investment, whereas, in PPF loans only 50% of the available balance at the end of 4th year can be withdrawn after the onset of the 6th year. In other words, full amount cannot be withdrawn.
source: Policybazaar
The investment options EPF, VPF and PPF have their own merits and demerits. From the above comparison we can observe that EPF and VPF score over PPF in terms of Return on investment, Employer Contribution, Liquidity. But we also know that EPF and VPF cannot be subscribed to by self-employed and employees in un-organized sector, therefore PPF is a better choice.
source: Policybazaar

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