PPF - All you need to know

The Public Provident Fund (PPF) has been a staple investment option for generations of middle-class Indians. It is a gateway to investing, a trusted fixed-income source, attractive tax deduction, and much more. But is it good enough for your retirement, your children's education, or other life goals? Is it possible to overdo PPF? We look at all these and more.

Overview

Started in 1968 by the Government of India, PPF is a savings product that offers tax deduction under Section(C). As a EEE(Exempt, Exempt, Exempt) product, it is exempt from tax at all three stages, namely investing, capital gains, and withdrawal.

After the completion of its lock-in period of 15 years, the account can be continued with or without contributions in blocks of five years each. A PPF account can be opened by any resident of India by going to a nationalized bank, certain private banks, or any post office.

Features

• Tax deduction up to Rs. 1.5 lakhs under section 80(C)
• Guaranteed returns and tax-free withdrawals
• Loan facility between 3rd and 6th year    
• Partial withdrawal after 7th financial year
• The interest rate of 7.1% for April 2020 - June 2020

What you see is what you get

The interest rate of PPF is decided every quarter by the Ministry of Finance. For most of its history, PPF fetched more than 8%, even touching 12% for 14 years from 1986 to 2000. Its attractive returns and EEE status makes it among the best fixed-return products. In terms of returns, it fares much better than most FDs and certain low-risk debt funds because the maturity amount is not taxed. 

But is PPF enough?

At a time when the Sensex is falling to record lows, some mutual funds are winding down, and recession is looming, one can see why some would prefer PPF. Even in times like these, PPF can only be one in many assets in a portfolio.

Liquidity
As it is with NPS, a long lock-in period of 15 years is designed to encourage savings and financial discipline. Although there is a scope of partial withdrawal, it still ties up your money for a long period. It goes without saying that most of your investment should be in a product with good liquidity.

Taxation
Choosing investments primarily for their tax deductions isn't a good strategy and this holds true for PPF as well. Assuming you need to claim the entire tax deduction of Rs. 1.5 lakhs, there are many other options apart from PPF. These include repayment of home loan principal, NPS, EPF, life insurance premium, children's tuition fees, ELSS, and tax saving FDs. If you are able to claim your entire deduction with these, PPF won't offer you any extra tax deduction.

Returns

Although post-tax returns of PPF are better than most FDs, it still beats inflation only by a small margin. To illustrate, if you were to invest Rs. 12,500 every month (or Rs. 1.5 lakhs per annum), your maturity amount will be Rs. 40.68 lakhs. By diversifying your portfolio and earning a post-tax interest of 9.5%, you can get the same amount by investing around 19% less, i.e. Rs. 10,194.

Although one can invest a maximum of Rs. 1.5 lakhs in PPF per financial year -- any amount over it doesn't fetch interest -- there is no such limit in most other assets. If you choose your products well, you can increase your investments as well as ROI.

PPF for life goals

Some of the life goals for which people invest include children's higher education, their wedding, or creating a retirement corpus for oneself. Since PPF can be extended indefinitely or created in the name of one's children, is PPF enough for these goals? It is useful, but not enough. 

Investing for children’s education or wedding: Although any parent can create an account on behalf of his kid(s), the total amount one can invest in all the accounts (including his/her own account) is Rs. 1.5 lakhs. Effectively, your investment only gets split into different accounts. Even in such a case, the maximum amount you can get over 15 years as per the current rate of 7.1% is Rs. 40.68 lakhs. For most people, this amount alone will not be enough in 2035.

If you have a young girl child, a good alternative is Sukanya Samriddhi Scheme which offers better returns and tax exemptions for a longer lock-in period.

Investing for retirement: You can create an account and invest on behalf of your spouse. Even then, the maximum amount you will get at maturity after 15 years is Rs. 81.36 lakhs from both accounts. If that amount isn’t enough for today, would it be enough more than a decade later?

Summary

If you are starting your career or expecting your first salary, you can use it to park a small portion of your money. However, bear in mind that it ties up your money for a long time and fetches a return slightly more than inflation. Therefore, a product like ELSS performs better than PPF on both returns and liquidity while offering tax deductions. 

Instead of putting all your eggs in PPF, why not check out ELSS based tax-savers from Wealthy? 

Did you know?

• The lock-in for PPF is actually a little longer than 15 years. The maturity date is calculated based on the end of the financial year in which the account was opened. If you are opening an account in May 2020, your maturity date will be 15 years from March 31, 2021. Thus, you can withdraw your money on April 1, 2036.
• You need a minimum of Rs. 500 to keep the account active.
• While you earn the most interest if you deposit before the 5th of every month, the difference is not a lot in the long run. 
• NRIs cannot open a PPF account. However, they can continue to operate the account if it was made while they were a resident of India.
• The money in a PPF account cannot be attached by a court to recover any debt. However, it is still liable to be attached by the Income Tax Department to recover any tax due.