It’s Traditionally  been viewed as a retirement saving tool and one that allows you to avail of tax deductions. In fact, you will find that most conversations about provident funds only take place during the income-tax filing season, or when salaried individuals are retiring or leaving one organisation for another. In fact, fairly little is said about the different types of provident funds or what is can bring to you portfolio as an investment tool. To give you insights into these benefits, some of which are likely to change once the direct tax code becomes applicable, SundayET spells out the ABC of provident funds.

Before getting into the nitty-gritty, it’s important to know the fundamental difference between Employees Provident Fund (EPF), Voluntary Provident Fund (VPF) and Public Provident Fund (VPF). The EPF is a mandatory scheme for individuals who are employed and include contributions both on the part of the employer as well as that of the employee. The contributions are generally made at a specified rate of 12% of the basic salary and you will find these deductions clearly specified on your salary slip every month.

However, if you’re interested in contributing a larger amount of your salary towards the provident fund, the VPF scheme gives you this opportunity. It is largely seen as an extension of the EPF scheme, which allows you to make contributions according to your discretion over and above the required 12%. Meanwhile the option of subscribing to the PPF, is available to both self-employed as well as salaried individuals. You can easily open a PPF account with a bank or even a post-office in your vicinity.

Moving on to the actual benefits, the rate of interest that you will get on you EPF and VPF savings is about 8.5% per annum while that on the PPF is 8% per annum. The added benefit is that interest on the accumulated balance in provident fund is exempt from tax, both in the case of the EPF as well as the PPF. According to Sonu Iyer, partner at Ernst & Young, the tax free interest income that is available on contributions to the provident fund is much higher than any other investment avenue available. “Both the schemes continue to remain good long-term savings and investment planning avenues primarily because the investments out of these funds are made in accordance with the guidelines laid down by the Central Government, which aims to ensure safety of capital and decent returns.


In terms of taxation of the amount that is invested in the EPF, you will find that the monthly contribution that your employer makes towards your provident funds will not be taxed in the hands of the employee. Also, under Section 80 C of the Income Tax Act, you can avail of a deduction for contributions of up to Rs 1 lakh towards PF contributions. However, if your employer contributes in excess of 12% towards your provident fund, then that amount will be taxed in the hands of the employee. In the case of PPF, the contribution is capped at Rs 70,000 per annum. However, Iyer points out that “The cap of Rs 1 lakh available under Section 80C of the Act applies jointly to EPF and PPF contribution. Thus, investments exceeding Rs 1 lakh to EPF and PPF will not be eligible for exemption under Section 80C of the Act.”

While contributions to EPF funds, in most cases, are made till the time of retirement or of death of the individual, in case of the PPF, the account is opened for 15 years and thereafter the funds could either be withdrawn or continue to be invested for five years each. However, if the employee withdraws accumulated provident fund amount (EPF) before rendering five years’ of continuous service, the sum representing the employer’s contribution and interest on employer and employee contribution is taxable in the hands of the employee.

In certain specified cases, an individual could also take a loan against his PF contributions. In the case of PPF, this can only be made after one year from the end of the year in which he subscribed to the fund but before five years from end of the year when subscription was made. “However, the maximum amount of loan that may be availed by an investor is a sum not exceeding 25% of the amount to his credit at the end of the second year immediately preceding the year in which the loan is applied for. It is essential to pay the principal amount of loan before the expiry of 36 months from the first day of the month following the month in which then loan is sanctioned. You will be charged an interest at 1% if the loan is repaid within 36 months. If the amount of loan is not repaid within 36 month, interest on outstanding amount of loan is chargeable at 6%.

However, once the Direct Tax Code comes into effect in April 2011, both the PPF and the EPF, which are currently under the EEE regime, are likely to move to the EET regime of taxation. Therefore, the benefits received in respect of contributions made after 2011 would be taxable. However, the balance accumulated along with the accretion thereon till March 2011 shall be exempt from tax at the time of withdrawal.


• EPF offers interest at 8.5%, it is 8% for PPF. Moreover, tax free interest income on provident fund is much higher than other investment avenues

• You can avail of tax deduction for up to Rs1 lakh contribution to provident fund, however this includes contribution to both EPF and PPF.

• You could also take a loan, under certain conditions, against your provident fund contributions.

• There is also a safety net associated with these contributions, given that they are in accordance to Government guidelines.

More Under Income Tax


  1. RAJESH GANDHI says:

    1-Whether DTC exist at present
    2-Whether withdrawl of PPF is taxable under DTC
    3-Whether For How many years PPF account can be extended after 15+5

  2. vishal Saraswat says:

    I want know that I had left my job after 5 yrs & I had withdrawn my PF account amount then what will be the effect in my returns whether I have to pay tax or not for the PF ? Please guide me as soon as possible for the prepartion of my returns of 10-11

  3. satya says:


    I joined in service in 2002 and later moved to a different business in the same company. Both business have PF accounts in different states so I had 2 PF accounts. I withdrew my first company PF last year(2010). Should I need to pay tax on the withdrawl.

    Kindly reply.


  4. Randeep Singh Oberoi says:

    Dear …

    I have resigned from HDFC Bank after 4years of service and my PF amount comes to 3.40 lacs ( Incl. 50% of my own contribution ). Earlier I have also rendered service of 13 years in Bank of India and 2 years in Indusind Bank.
    May I know the tax implications on PF from HDFC Bank. I shall be thanful If an early reply on this is given.

  5. kk says:

    If the employee quite the service before 5 yrs choses to withdraw his PF. Will he be taxed?

    If yes, taxed amount can be include in IT TAX in current financial year.

  6. Jagdish Mahajan says:

    I am contributing total about 3 Lacs per annum in EPF (12% of Salary) , VPF (48% of Salary) & PPF regulerly, though I am getting Tax exemption of Rs. 1 Lac annualy under section 80C.

    When the Direct Tax Code comes in force from 2011 with EET regime on Tax, should I continue with the same investment of Rs. 3 Lacs per annum or should I invest in some other Avenue.

    I am getting Retired in April 2014

    I also want to know, that whatever interest I will earn (after April 2011) on the extra PF & PPF deposites (made before April 2011) will be taxable or not at the time of withdrawal after my retirement.

    Please anwer my queries, so that I may plan for saving for next year

  7. Samir says:

    Dear Sir,
    I’m confused on the PPF Taxation policy at the time of withdrawal in Direct Tax code.

    Exp : A person keeps Rs.70000/- every year in PPF for 15 years.

    At the time of maturity he might have kept : Rs.70000 x 15 Years = Rs.1050000/-

    However the cumulative total value along with Interest would be : Rs.2052700/-

    So I have following questions :
    =>Suppose that time the persons Annual Taxable income is 15 Lac.
    1) Will the entire withdrawal amount be included with his Taxable income Rs.15 Lac to calculate the tax ?
    2) Or only the interest part of PPF Rs.1002700/- would be included with his taxable income Rs.15 Lac. to calculate the tax ?
    2) Or only the interest part of PPF Rs.1002700/- would be taxable independently (TDS @Bank) at a flat rate ?
    3) Or the entire withdrawal amount Rs.2052700/- would be taxable independently (TDS @Bank) at a flat rate ?
    4) If bank would deduct the TDS in a flat rate from the PPF account at the time of withdrawal. What is that Flat rate in Direct tax code ?
    5) The person would get Tax benefit of Rs.70000/- every year or not ?
    6) How much all total he can get the tax benefit every year for these investment ? Is it Rs.300000/-

    Please help me to come out of confusion !

  8. dheeraj says:

    i have resigne from govt office after 15 yr of service.
    so the PF/GRATUITY fund i got in 2009 will be tax or not
    and how i will show it in my tax returns.
    thanks very much

  9. sumathi.J FCA says:

    Once the direct tax code is implemented it is going to reduce the savings rate in India. In India we have not heard of any nationalised bank becoming bankrupt. This is mainly because of the savings habit of the people when compared to people in western countries. Hence certain amendmends have to be made in the direct tax code to be more effective and promote savings of the people.

  10. Venkatesan S says:

    I agree with the suggestion.
    Just like dividend distribution tax, interest distribution tax should be introduced, fixing the rate at 10%. This will ensure hasslefree and prompt collection of tax, avoiding leakages. It will also simplify the life of senior citizens and other fixed income earners. Perhaps a cap on investments in FDs and bank deposits, NCDs and other financial instruments be put at say Rs.2cr. as suggested. This could be monitored with PAN.

  11. S K Lahiri says:

    On the interest earned on bank savings account and FDs (upto a limit of say, Rs. 2 Crores), income tax at flat 10% should be deducted at source by the bank. It should not require to be again included in income for total tax calculation. – This would encourage small savings and would much simplify filing returns. Please take it up with Finmin.

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January 2021