Should you pick PF over PPF?
They’re both highly advantageous, being tax-free under section 80C, but does one offer larger benefits than the other? We compare the two long-running government schemes.
So long as the Rs1 lakh made available under Section 80C, many of us are satisfied. Rather than see it as an opportunity to combine investment with tax savings, it’s seen merely as an opportunity to save on tax. Maybe you’ve heard that unit-linked insurance and endowment plans are bad for you, so you’ve stayed away from them. That’s good. What about the provident fund (PF) and public provident fund (PPF), though? They’re both essentially debt schemes with a long lock-in period, but which one you pick depends on the following:
If you’re a lazy investor: Pick PF over PPF
If you’re not a disciplined investor, automating your investments is a good idea, particularly if the investment is suitable. With the PF, you are required to contribute 8 to 12% of your basic salary and your employer will match that amount. These contributions are known as the employee PF (EPF). You can, however, make additional contributions to this amount by simply informing your employer of the additional proportion of your basic salary you would like to invest. These additional contributions are known as voluntary PF (VPF). It is the same as the EPF, except that your employer won’t match the amount, of course. The reason this is good for the lazy investor is that you simply need to inform your employer once. With the PPF, on the other hand, you will need to go to State Bank of India or the post office to make the investment, then show the receipt to your employer to prove that you’ve made the investment. Furthermore, you may contribute an amount even beyond the Rs1 lakh allowed under Section 80C through the VPF.
Emergency withdrawals: Pick PF over PPF
If you believe you’ll need to make partial withdrawals from the amount you’ve invested, you may want to stick to PF. This is because you can make withdrawals in case of an emergency immediately. If there’s a medical emergency involving you or any immediate family member, you can make withdrawals. Then, if you’ve completed seven years, you may make withdrawals for your child’s education, purchasing a house or plot of land. On the other hand, with a PPF account, no such withdrawal can be made until five years are completed. When five years are up, you may withdraw either 50% of the previous year’s balance or 50% of the balance in the fourth year immediately preceding the year of withdrawal, whichever is less. Only one withdrawal a year is permitted.
Lock-in periods: Pick PPF over PF
The PPF is a long-term scheme that locks your money in for 15 years. Until this time is up, restrictions are placed on withdrawals. Once the 15 years are up, though, you could withdraw your money, let the money earn interest at the declared rate each year or extend the account by five years. With the first two options, no restrictions are placed on withdrawal. With the third, you may withdraw 60% of the corpus at any time tax-free. With EPF meanwhile, you can’t touch the money until you retire for any reason other than those mentioned above. Furthermore, you may make withdrawals only three times in your tenure. On the other hand, at the time of switching jobs, you do have the chance to get your money out of the scheme tax-free, provided you’ve completed at least five years of service.
Interest rates: Can’t say
For all other investments, the interest rate is of utmost importance. With PPF and PF, it isn’t so because the rates are usually very similar and there is not telling how the rates will move in the future. For example, in 2010-11, PF gave a return of 9.5%, while PPF returned 8.5%. In the three years since, though, PPF has always grown its funds at a higher rate. For what it’s worth, the PPF will pay 8.7% this year (2013-14), as compared to 8.5% with the PF.