7 reasons to open a PPF account

May 08, 2017

There's little doubt this tax-advantaged account is a favourite among savers. Despite its popularity, there are many who do have one. Here are some reasons that could urge you to open a Public Provident Fund, or PPF, account.

Reason 1: You do not get a fixed salary and struggle with cash flows.

The minimum investment is Rs 500/annum and it can go up to a maximum Rs 1.50 lakh, which is the limit under Section 80C. The amount does not have to be invested at one go but can be done over maximum 12 installments in a year.

If you struggle with cash flows, the flexibility of deposits is a great advantage.

Reason 2: You get job transfers frequently.

Mobility is no problem. Individuals can open a PPF account at any branch of State Bank of India, its associated banks, certain nationalized banks, and the post office. Private banks like ICICI Bank and HDFC Bank also provide this service.

If shifting residence, intra city or to another city, the account can be transferred to a bank or “account office” that the account holder chooses.

Even if you get transferred abroad, you can continue with your account. Non-resident Indians cannot open a PPF account. However, if an individual attains the NRI status after the account has been opened and is functional, he can continue with the account till maturity (though the money cannot be repatriated).

Reason 3: You want an assured return from your investment.

The return is assured but flexible. You are promised a fixed return every year, though the exact figure fluctuates. The returns are fixed by the government and reset every quarter to keep the instrument aligned with market rates.

At one time, the instrument earned 12% per annum. At the turn of the century it dropped to 11% and went further down to 8%. It moved up for a while touching 8.8% before beginning a downward journey to the current 7.9%.

Reason 4: Safety is of paramount importance to you. 

Any sovereign backed investment (which means it is issued by the national government of a country) stands for the highest safety. Since the funds in PPF are backed by the central government, the investment does not get any safer than this because the government will not default in its payment.

Moreover, the amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder. While it was given to understand that the Income Tax authorities can attach the account for recovering tax dues, the court has ruled otherwise. (Source: Taxguru.com, Tax blog, Taxvani.com).

Reason 5: You want a tax break. 

Investments made in PPF are eligible for a deduction up to Section 80C. The interest earned is not taxable. Finally, on withdrawal, no tax is levied on the maturity amount. In other words, EEE.

EEE stands for Exempt, Exempt, Exempt:

  • Your investment is allowed for a deduction. So, you don’t have to pay tax on part of the income that equals the invested amount.
  • You don’t have to pay any tax on the returns earned during the accumulation phase.
  • Your income from the investment would be tax-free in your hands at the time of withdrawal.

Reason 6: You want a long-term saving instrument. 

What generally tends to put investors off is the long tenure of the PPF account. The PPF account has to be held for 15 years, and then can be extended in blocks of 5 years. However, the 15 years are calculated from the end of the year in which the initial subscription was made. In reality that translates to 16 years.

On a positive note, this can work to the investor’s benefit as a smart savings tool. The money is locked in – which makes it an excellent long-term savings tool, you get a tax break, the interest-free return is compounded annually and not taxed. This is a great way to accumulate money for a goal. For instance, if you are 30 years old when you open an account, on maturity the money could come in handy for your child’s higher education. If you are viewing it as a retirement kitty, then on maturity, extend it by a 5-year block. Or, if you and your spouse are each managing your own PPF accounts, one account can be used for retirement savings, the other for another goal – such as child’s education or marriage.

Reason 7: You want an instrument to complement your equity portfolio. 

PPF is a better option when compared to the regular bank deposit or NSC due to the post-tax breaks. However, investors saving for long-term goals like retirement need to consider other investment avenues like equity which has been known to beat inflation and outperform debt investments over the longer term. For instance, Rs 1.50 lakh invested in PPF and another Rs 1.50 lakh invested in a 50:50 equity (Sensex) and debt (CCIL Government securities index) portfolio in March 2004 would have grown to Rs 491,000 and Rs 640,388, respectively, by March 2017.

So PPF should not be your sole savings instrument, it should complement other aspects of your portfolio.

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Vaishali Kale
May 9 2017 09:26 AM
Nice article..
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