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What is the Difference Between Pension and Provident Funds?

Provident funds and Pension funds are two types of retirement plans for employees. Employers are usually responsible for offering and managing pension funds, where the employer contributes a percentage of the employee's salary.

In contrast, the Provident Fund is a government-run retirement scheme where both the employer and the employee must make equal and fixed contributions every month.

In the following sections, we will discuss both options and draw a comparison between pension funds 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?

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?

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?

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.

Other Important Articles Related to Retirement & Pension Plans

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Retirement Investment Plans in India

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Disclaimer

This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.