Should You Put Money in PPF?

I live in India. We are a heavily taxed country. The worst bearers of this tax system is the salaried class. Of the limited avenues available to save tax, Public Provident Fund (PPF) is one.


In my opinion, it is one least efficient sources to save tax.


Let us first look at the features of PPF:-


Public Provident Fund Scheme is the most popular saving scheme in India. It is framed and governed under Public Provident Fund Act (PPF), 1968. PPF is a government scheme where small amounts of funds can be an investment regularly. The aim of PPF is to provide retirement security for self-employed and workers from the unorganized sectors, hence PPF has a long lock-in period for investments. Following are the key highlights of PPF schemes


  1. Indian Citizen who is a Resident Indian can open PPF account. He might be salaried employee or self-employed or any other person.
  2. PPF account can be opened with the State Bank Of India, or its associates or any other Certified Nationalized Bank.
  3. PPF account is opened for a minimum period of 15 years. This tenure can be further extended for a minimum term of 5 years.
  4. In a financial year, an investor can deposit minimum of Rs. 500 and maximum of Rs. 1,50,000/- in their PPF account.
  5. Government pays yearly interest on the balance in the PPF account. Interest earned in the PPF account can only be redeemed after maturity.
  6. Interest received from PPF investments is Tax Free.
  7. Deduction U/s 80C of Income Tax is available for the amount invested in PPF.
  8. Amount in PPF can be withdrawn from the 7th year onwards. This withdrawal amount is restricted to 50% of the previous years balance.
  9. Loan against the balance in PPF account can be availed after three years. Maximum of 25% of the balance in the PPF account is made available as the loan amount.
  10.  Amount received at the time of maturity is completely tax-free.


On paper, the scheme looks very attractive. It is also a very good scheme for those looking to safely save tax. However, it is not a very good option for those looking to maximize returns and save tax at the same time. I say this, as PPF returns are very low to begin with and gets really in the red, if we account for inflation adjusted returns.


Let us understand this with the help of an example:


Suppose you invest Rs. 60000 per year in your PPF account. After 15 years, @8.70%, the total maturity amount will be Rs 18.7 lacs or an interest of Rs. 9.7 lacs.


Now suppose that you invest the same Rs. 60,000 per year in a ELSS mutual fund. Assuming a conservative return of 12%, corpus amount will be approximately Rs. 25 lacs. Now, many will say that there are risks involved, but the long term investment will negate this risk.


So, if we compare, we get almost Rs. 7 lacs more than PPF from mutual fund investment. Also, the lock in period is only 3 years instead of the 15 years in PPF. For me, the investment decision is very clear. Please let me know what you think about PPF.

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