Why Should You Invest in a Public Provident Fund Account in India

public provident fund

A public provident fund (PPF) account is like a timeless melody; going strong since ages. Newbies of investment world have not managed to reduce its charm. Now with the new announcement in budget 2014 you can benefit by investing more in the Public provident fund account yearly. Just find out why?

As per Budget 2014 you can invest up to Rs. 150,000 instead of 100,000 under schemes covered under Section 80C. This means that you can invest Rs. 50,000 more and save tax on the additional savings done.

Case Study
Ever since this announcement, Sijo has been wondering where he should invest the additional Rs.50,000. Let’s see why the public provident fund account can be a good choice.

Why Public Provident Fund

Before we discuss the reasons for investing the additional amount in the public provident fund account it is important to emphasize on aspect that it is suitable for fulfilling long-term goals and matches the investment requirements of the risk-averse investor. Those who want a high return option and are willing take some risk, other options can be explored.With the increase of the limit of investment, under Section 80C, the limit of investment in the public provident fund was also increased to Rs. 150,000 per year.

Now let us look at the various features that make investing in a public provident fund  lucrative.

1. Tax Efficiency

All investments covered under Section 80C help you in getting a tax rebate but public provident fund has the unique feature that the interest earned on it is also tax free. Thus you get double benefits as far as the tax aspect is concerned when investing in the public provident fund account. You do not have to pay any tax at the time of maturity and public provident fund amount is free from the purview of Wealth Tax too. So it’s like a blanket exemption from paying tax!

2. Flexibility of Deposit

Unlike insurance schemes or bonds where you have to deposit a lump sum yearly (usually a minimum of Rs. 10,000), the public provident fund account offers flexibility of investment in terms of amount and frequency. The minimum investment amount is Rs. 500 per year. So in case in one particular year you do not want to invest a big amount due to a particular reason you can just invest the minimum amount.

If one chooses to invest in the public provident fund account on monthly basis it is advisable to do so before the  5th of the month so as to not lose out on the interest for that month. If making a onetime deposit be sure to invest before the 5th April so that you earn the interest for the entire year.

Case Study
Again let’s say Sijo wants to invest 60,000 in his public provident fund account. He does not have to do it in one go; he can simple choose to invest Rs. 5,000/month in his account without the hassle of filling any form or approaching an agent. It’s as simple as depositing money in a savings account.

3. Returns

Earlier the public provident fund rate was fixed but now it has become flexible. It is linked to the yield of 10-year government bond and is subject to change each year. Currently it has been fixed at 8.7% which makes it competitive with the post office and the fixed deposits. Though if you compare with equity linked schemes or mutual funds then it will not match the indicative returns.

But always remember market linked products offer indicative returns and there is no guarantee or safety of either returns or even the capital. When we consider the extra tax advantage offered by the PPF account then its returns prove to be much more lucrative as interest is also tax-free.

  FD @ 9% Bonds @ 10% PPF @ 8.7%
Amount after 10 years 24352 26851 23648
Tax @ 10% 2435 2685 Nil
Post Tax 21917 24166 23648
  FD @ 9% Bonds @ 10% PPF @ 8.7%
Amount after 10 years 24352 26851 23648
Tax @ 20% 4870 5370 Nil
Post Tax 19481 21481 23648

The above table clearly reveals that for those in the higher tax brackets (we have taken example of 20% only but it holds true for 30% bracket all the more) post tax returns on the public provident fund are much better when compared to other fixed return instruments like Fixed Deposits or bonds. For those in the 10% bracket it would be definitely be better than the current rate Fixed Deposits but with a bond some comparison might be needed before investing.

4. Some other advantages

Being a government backed scheme the public provident fund is an absolutely safe option and there is no fear of either the capital or interest getting lost. Since its long term and you earn interest on interest. At the end of the ion/marriage period you will have a handsome amount which can be used for retirement, child education/marriage etc. Public provident fund account can be opened for a minor too and you can get the tax rebate on the investment made in these accounts. They can be opened for the spouse as well.

Lock-in period can be a spoiler

While a lot of features do make the public provident fund investments lucrative, the long lock-in period is a dampener. Usually all tax saving instruments have a lock-in period for the public provident fund account it is 15 years. However partial withdrawal is allowed from the 7th year and you can also take loan against the public provident fund.


About the Author

Nidhi is an ex-banker with a passion for writing and reading. She now combines her banking experience with her love for writing and pens articles for various financial sites.

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