PPF: How to get the best out of it

Jan 24, 2020

The Public Provident Fund, or PPF, is a government backed small-saving scheme. Though started in 1968 with the objective of providing social security during retirement to workers in the unorganized sector and for self-employed individuals, it has become a very popular tax-saving instrument.

The Return 

The return is guaranteed (assured return) but keeps changing (flexible). By that I mean, you are promised a fixed return every year, though the exact figure fluctuates.

Once upon a time it returned an enticing 12% p.a. to gradually taper down to 7.9% p.a., where it currently resides. There are spurts - at one time it moved from 8% p.a. to 8.8% p.a.

The interest is compounded annually and credited to the account on March 31 every year. However, the rates are fixed every quarter. It is not an ad-hoc quarterly adjustment, but benchmarked against the 10-year government bond yield. This periodic exercise is to keep it aligned with the current interest rate scenario.

Here’s another twist; the interest is calculated on a monthly basis though credited into the account at the very last day of the financial year. Interest is payable on the lowest amount between the 5th of the month and the end of the month.

  • Interest rate is compounded annually
  • Interest rate is reset every quarter
  • Interest is calculated on a monthly basis
  • Interest is paid on the lowest amount between the fifth of the month and the last day of the month
  • Interest is credited to the account at the end of the financial year

The Tenure

Theoretically, the PPF comes with a lock-in period of 15 years.

Technically, it is 16 years.

The maturity date is not calculated from the date of the opening of account. Instead, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made, irrespective of the month or date in which the account was opened.

Let's say you made your first contribution on August 26, 2013. The lock-in period of 15 years will be calculated from the March 31, 2014, and the year of maturity will be April 1, 2029.

Even if you make your first contribution on March 1, 2014, the lock-in period of 15 years will be calculated from March 31, 2014, and the year of maturity will be April 1, 2029.

The Tax

The lure of this investment is the safety and the triple tax break - EEE. EEE is an acronym for Exempt, Exempt, Exempt.

  1. Your investment is allowed for a deduction under Section 80C up to Rs 1.5 lakh. So, you don’t have to pay tax on part of the income that equals the invested amount.
  2. You don’t have to pay any tax on the returns earned during the accumulation phase.
  3. Your income from the investment would be tax-free in your hands at the time of withdrawal.

How to get the best out of the account

Position your PPF account as a retirement savings tool. Or, if you have just started an account and have a newborn, you can position it as a savings towards your child’s higher education. Whatever be the goal, have a long-term perspective in mind.

You can decide how much to invest in the account every year. The minimum being Rs 500 and the maximum being the limit under Section 80C – Rs 1.50 lakh. If it fits your asset allocation and long-term goals, deposit the entire amount (Rs 1.5 lakh) every year. And do so in the very first month of the financial year – April. This will help you get the best out of it.

PPF works on the principle of compounding. Let’s say you invest Rs 1.5 lakh every single year in April and do so for 15 years. This is what it is will look like:

  • Investment: Rs 22,50,000 (deduction under Section 80C)
  • Interest: Rs 21, 10, 517 (tax free)
  • Maturity: Rs 43,60,517 (tax free)

This lump-sum is tax free. The above calculation was done @7.9% per annum.

If you cannot afford to put in a huge amount at one go, you have the option of a maximum 12 installments, each requiring a minimum of Rs 500. Do deposit it before the fifth of the month, as explained earlier.

Opt for it once you have your entire asset allocation in place. In Earn the right to invest, I explain my stance in more detail.

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Mukund Pawar
Jan 27 2020 07:00 PM
Very nicely explained.
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