PPF vs EPF – Which Offers More Flexibility in Withdrawal and Availing Loan?

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Everyone thinks of building a corpus for a peaceful retirement life, don’t they? Building a corpus, though, may not be as easy as one would think of. It’s because of the uncertainties and emerging needs that can arise in the due course of time. While some may need instant money to spend on emergencies such as a sudden medical treatment, others would want to accomplish ambitious goals like education and marriage.

Therefore, it calls for a great deal of flexibility in choosing a financial instrument that can help you tide over the uncertainties, besides laying a strong foundation to live a tension-free retirement life.

And often, the coin is tossed up between Employees Provident Fund (EPF) and Public Provident Fund (PPF) to serve such purposes. It’s because these instruments provide partial withdrawal and loans, apart from accumulating interest income for the subscribers on their deposits. So, let’s compare EPF and PPF to find out the better of the two.

Comparison Between PPF and EPF on Withdrawal Norms

PPFEPF
Interest Rate - 7.80% per annumInterest Rate - 8.60% per annum
Lock-in Period - 15 YearsNo Lock-in Period
Partial withdrawals permitted from 6th year onward

Withdrawal amount to be lower of the following

50% of the balance remaining at the end of the 4th year immediately before the year of withdrawal

50% of the balance in the preceding year
Partial withdrawal allowed for purposes like buying or constructing a flat, education or marriage of children.

EPF proceeds can be withdrawn after 2 months from leaving the job
Minimum Deposit Amount - ₹500Employee Share - 12% of Basic Salary

Employer Share - 12% of Basic Salary

Pension Corpus - 8.33% of the combined employee and employer share to EPF contribution
Maximum Deposit Amount - ₹1,50,000-
Tax deduction allowed up to ₹1.5 lakh in a financial yearNo tax liability on withdrawing the corpus accumulated after 5 years of continuous employment

On employee being terminated due to reasons such as discontinuation of employer business or ill health, there won’t be any tax on withdrawal

No TDS will apply on withdrawing the corpus before 5 years of continuous employment if submitted the PAN along with Form 15G/15H to EPFO. In the absence of the same, 30% TDS will be deducted

The TDS deduction can come down to 10% on submission of PAN and not Form 15G/15H
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Note – Continuous employment has a broader connotation. So even if you had not 5 years of experience in your previous organization but have shifted the EPF account to an existing employer and complete 5 years on a combined basis, it will be considered as a continuous employment for the said number of years.

Which Holds the Edge – PPF or EPF – Over Loan Disbursement?

The intricacy of availing a loan against PPF and EPF proceeds can be best understood by explaining them separately. Let’s start with PPF before taking a close look at EPF with regards to a loan.

Loan Against PPF

A PPF subscriber can avail a loan against his/her accumulated reserves from the third financial year onward. However, the loan can’t be availed after the end of the 6th financial year. So, if your account was opened during FY 2013-14, you can avail a loan anytime between FY 2015-16 and 2018-19. The quantum of finance, though, is restricted to 25% of the balance remaining at the close of 2 years immediately preceding the year of loan application. So, if a PPF subscriber applies for a loan during 2017-18, he/she can receive 25% of the balance, as on 31st March 2016, as a loan. Take a look at the table below to find out the loan eligibility.

Financial YearsOpening Balance (In ₹)Deposits Made in a Year (In ₹)Rate of Interest (In ₹)Closing Balance (Post Addition of Interest Income) (In ₹)
2013-14-1,30,0008.70%1,41,310
2014-151,41,3101,50,0008.70%3,16,653.97
2015-163,16,653.971,50,0008.70%3,57,252.87
2016-173,57,252.871,50,0008.10%3,98,340.35

So, a PPF subscriber can get a loan at 25% of ₹3,57,252.87, the balance as on March 31, 2016, during FY 2017-18. If we calculate, the loan eligibility comes out to be ₹89,313.22. The interest charged on a loan is 2% more than the interest rate offered to a subscriber on PPF deposits. PPF interest rates stand at 7.80% for the quarter ending December 2017. So, as a subscriber, you need to pay off the loan granted against the deposits at a rate of 9.80% (7.80%+2%). PPF rates are set by the government on a quarterly basis.

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However, there are certain conditions pertaining to a loan against PPF accounts. Wanna know those conditions? Take a look at the points below.

  • The loan is granted only when the installments of the previous loan, if availed, are paid off in full.
  • The maximum loan repayment period is up to 3 years
  • The tenure of 3 years is calculated from the first day of the following month of loan sanction
  • If the loan is not repaid within 3 years, the applicable interest rate would be 6% from the date of loan sanction till the time of repayment
  • If the principal is repaid but the interest part of the loan is outstanding till the 3-year tenure, the interest so due will get debited from the account of a subscriber
  • Principal repayment has to be made in lump sum or in 2 monthly installments or more
  • The interest repayment begins post the payment of principal portion of the loan
  • The repayment of interest can’t be made in more than two monthly installments

Loans Against EPF

While accumulating wealth via an EPF, you may require surplus money to fulfill imminent needs. And you can get an advance against your EPF deposits for purposes such as marriage, education, buy & construction of a home, plot purchase, addition & renovation of a house, medical treatment, etc. The good thing is that this will be treated as an advance and not a loan.

The retirement body Employees Provident Fund Organization (EPFO) has set a purpose-wise list of advance norms. Let’s just read those in the table below.

PurposeQuantum of AdvanceLength of EPFO Membership Sought (In Years)Maximum Number of Advance PermittedProof Required
Marriage50% of employee share plus interest at the time of submitting the application73Wedding Card may be required
Education50% of employee share plus interest at the time of submitting the application73A certificate regarding the course of study and its estimated fee
Medical TreatmentBasic Salary months + Dearness Allowance of 6 months or employee share with interest, whichever is lowerOne just needs to be an EPFO member, irrespective of the length of membership1A doctor’s certificate may be sought
Home PurchaseUp to 90% of the employee and employer’s contribution to EPF along with interest or cost of the property, whichever is lower

Advance disbursement subject to certain conditions from bank or EPFO
31A statement from a certified architect showing the cost estimates of the sought out property
Home Loan EMI repayment36 months basic salary + dearness allowance or the combined share of employee and employer to EPF with interest or total outstanding principal + interest, whichever is the least.

However, the EPF corpus including interest has to be more than ₹20,000 to be granted an advance for EMI repayment

Other conditions as specified by the bank or EPFO
31A certificate from a lender showing the repayment of principal and interest
Plot PurchaseUp to 90% of the employee and employer’s contribution to EPF along with interest or cost of the property, whichever is lower

Advance disbursement subject to certain conditions from bank or EPFO
51A certificate from the competent authority showing a cost estimate of the plot you are looking to buy
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Even though EPF advances may seem an attractive option, it should be your last resort. It’s due to the fact that a large EPF corpus can help you live a prosperous retirement life. But even if you withdraw from the corpus, make sure to keep it in the range of 20%-30% or less. If your needs can’t be fulfilled by the same, you can withdraw from your PPF deposits along with the stated levels of EPF balance to serve your purpose.

Though, when it comes to a loan, PPF does not offer much flexibility as a subscriber can apply for the same between 3rd to 6th financial year only and not before or after the said period. So, in case you require a big corpus to fulfill purposes like buying a home, you can opt for a combo of EPF and a separate home loan. This will ensure a build-up of the retirement corpus while enabling you to realize your wish of purchasing a home. What will encourage the subscribers to avail a home loan is the fact that interest rates have eased more than 100 basis points over a year to 8.30%-8.70% per annum across banks in India.

Personal Loan Interest Rates January 2018
Bajaj Finserv 10.99% - 16.00%
Fullerton India 14.00% - 33.00%
HDFC Bank 10.99% - 20.70%
ICICI Bank 10.99% - 18.40%
IndusInd Bank 12.99% - 20.00%
Kotak Bank 10.99% - 17.99%
RBL 14.00% - 18.00%
Standard Chartered Bank 10.99% - 14.49%
Tata Capital 11.49% - 18.00%
Home Loan Interest Rates January 2018
State Bank of India/SBI 8.30% - 8.60%
HDFC 8.35% - 8.95%
Bank of Baroda 8.30% - 9.30%
LIC Housing 8.35% - 8.70%
PNB Housing Finance 8.35% - 8.70%
ICICI Bank 8.35% - 8.85%
Axis Bank 8.35% - 8.75%
Citibank 8.60% - 9.35%
Indiabulls Housing Finance Limited 8.35% - 8.55%
Kotak Bank 8.35%
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