Provident Fund

Provident fund scheme was setup to help people build a retirement corpus. These are of 2 types:

• Employee provident fund
• Public Provident fund

A person can invest both these schemes. Any contribution to both the funds is allowed as a deduction from income under section 80C of the Income tax act. Though the interest rates may sound low, because of the tax exemption the return is larger. A cherry on top of this, is the interest earned is also tax free. The amount in these accounts is also exempt from wealth tax.

One important thing to remember, money cannot be transferred from Employee Provident Fund to Public Provident fund of vice versa. What is the difference between both the types of provident funds? Let’s try and understand each of them.

Employee Provident fund:
This fund is usually run by the Employee Provident Fund Organization. Though in large organizations the organization may run the fund on its own by forming a trust. 12% of an employee’s salary (Basic + Dearness Allowance) is deducted towards this corpus. The employer also contributes an equal amount. But from the Employers contribution 8.33% is transferred towards pension scheme and balance is added to the employees corpus. The Pension scheme is also run by the Employee Provident Fund Organization.

The money is returned to the employee on retirement along with Interest. Interest on the amount is declared on a yearly basis. Partial withdrawal is allowed from this fund for upto 90% of the employee’s contribution. This scheme is available only for salaried employees. If this account is closed before 5 years, the amount withdrawn is taxable.

The best part of this is employer contribution. But tax exemption is available only on own contribution.

Public Provident fund:
Any resident Indian can open a Public Provident fund account. The amount invested in this account is backed by the government. A person can invest upto Rs. 70000/- into this account in a fiscal year. A fiscal year is from April to March. The current interest payable on this investment is 8%.

The money in this account is locked for a period of 15 years. Partial withdrawal from this account is allowed after a period of 5 years limited to 50% of the balance on the date of withdrawal. If money is required earlier then the option is to take a loan. But the loan amount is limited to 25% of the balance.