What is the Difference Between Pension and Provident Funds?

What Are The Differences Between Pension and Provident Funds?

Learning about the differences between pension and provident funds is vital to ensure you choose a plan that suits your financial requirements. The following table will help you compare these two investment options.

Basis of Comparison

Pension Funds

Provident Funds

Definition

Pension funds are retirement plans where the employer contributes a certain percentage of the employee’s salary towards their retirement benefits. This is done as a consideration for their past services.

On the other hand, provident funds are retirement plans that require both the employer and the employee to make equal contributions for retirement benefits.

Providers

Employers are usually responsible for setting up a pension fund.

Provident funds are run by the government.

Eligibility Criteria

Both NRIs and Indian citizens are eligible to invest in pension funds.

Unlike pension funds, the benefits of provident funds can only be availed by citizens of India.

Contributors

The employer and Central Government contribute to certain pension funds.

Both the employer and employee have to contribute towards provident funds.

Statute

Employee’s Pension Fund Scheme 1995.

Employee’s Provident Fund Scheme 1952.

Limit on Deposits

Pension funds have no contribution limits.

On the other hand, the deposit limit on provident funds is variable.

Age Restrictions

The policyholder must be at least 18 years old to have a pension fund.

There is no minimum age for provident funds.

Taxation

The annuities in pension funds are subject to taxation as per Section 80C of the Income Tax Act 1961.

Provident funds are exempt from taxes.

Nature of Corpus

Pension funds offer the amount either in a lump sum or via regular payments, depending on the plan.

Provident funds provide the corpus amount in the form of a lump sum only.

Interest Rates

10 – 12%, depending upon the markets.

Fixed by the government. As of now, it is fixed at 8.60%, which can be revised later.

Withdrawal

The policyholder can only access the corpus amount on pension funds at the end of the investment tenure. A premature exit is allowed only after three years. The policyholder can withdraw one-third of the corpus while the remaining amount is used to purchase annuity plans.

PPFs have an investment tenure of 15 years, before which the individual cannot withdraw them. On the other hand, EPFs can be withdrawn before five years of service under exceptional circumstances. However, that would be subject to taxation. If the employee is unemployed for more than 60 days, then they can withdraw the amount quickly.

Pension funds and provident funds are different from each other based on some specific factors such as contributions, taxation, returns, withdrawal, eligibility, etc. However, they are both healthy retirement plans according to an individual’s requirements.

Before making a choice between pension funds and provident funds, one must consider which one suits his/her financial needs. The table given above can help in this regard.

FAQs on Difference between Pension Funds and Provident Funds:

Why are pension plans necessary? up-arrow

Pension plans are crucial for one’s retirement. They provide social and financial security to the policyholder after they retire. Pension plans provide a regular income and let people live stress-free without having to worry about money.

What is the purpose of an annuity? up-arrow

The periodic payments that one receives after retirement under a pension plan are known as an annuity. Annuities are usually received on a monthly basis. However, one can also receive it quarterly, semi-annually or annually.

Would I require a pension plan if I already have a provident fund account? up-arrow

Even if you do hold a provident fund account, it is always wise to have an additional pension plan to help with your expenses after retirement. Employers offer pension plans, and they invest a percentage of your salary into them.