PPF AS AN INVESTMENT

Public Provident Fund (PPF) is a small savings scheme backed by Government of India (GOI). It is essentially a debt instrument in which the investor is giving debt to GOI. As PPF is backed by the government the returns and principal are guaranteed hence it is a very low risk investment

PPF salient features! 

PPF account can be opened in post offices, nationalized banks and some private banks. The minimum deposit of Rs 500/- has to be made each financial year and the maximum deposit in a financial year is Rs 1,50,000/-. The interest rate of PPF is announced quarterly by the government (current interest rate is 7.1% per annum), interest is paid yearly and compounded yearly. There is lock in of 15 years that is the account matures in 15 years but can be extended further in blocks of 5 years. Premature closure for specific conditions like life threatening disease, higher education of children etc. is allowed. Deposits can be made maximum 12 times in a financial year. 

Tax benefits! 

The invested amount can be claimed as deduction from income for tax calculation purposes under section 80C if the investor is filing tax returns under old tax regime. Further the interest paid is also not taxed and on maturity the total amount is also not taxed. Hence the interest rate of PPF is the return you will get in your hands which may not be true for other investment options on which you will have to pay taxes. 

Who can invest! 

Any individual can open a PPF account, but only one account can be opened per person. However, an individual can open more accounts in name of minors if they are guardian. NRIs and HUFs cannot open PPF account. 

PPF vs other investments! 

PPF offers low risk tax free returns to the investors which at current interest rate of 7.1% are above the inflation rate( current CPI 5.69%). But there is always the interest rate risk associated with PPF as the interest rate is decided by government and there is lock in of 15 years government may reduce the interest rate in future. Among  other debt instrument only fixed deposits (FD) offer similar safety and interest rates are fixed for the whole duration of deposits but they carry the tax burden on interest earned being taxed at your income slab. The other option is bonds which are not as safe and also carry the same tax treatment as FDs. Investment in equity markets have historically yielded higher returns but they carry associated volatility with them which every investor may not have the appetite for. Hence PPF offer a good way to save money with low risk in tax efficient manner which at current market scenario is offering inflation beating returns which are compounded annually. A investor in PPF can expect their savings to maintain their purchasing power on maturity and increase by around 1.5%.