Tax Season Special: Public Provident Fund or PPF

Since the tax season is here, I decided to give a description of the various investment options available under Section 80C. Upto Rs. 1 lakh can be exempted from your taxable income. If you are in the 30% tax bracket, this will lead to saving Rs. 30,000. Of course, the returns on the investment are over and above that. Hence this is all the more reason to avail of this provision to the maximum possible extent.

This post deals with Public Provident Fund or PPF.

How to open a PPF account?
An individual can open a PPF accounts in a bank authorized to do so, like the State Bank of India. This account can also be opened in the name of your children. However, each individual can have only one PPF account. Documents to be submitted include PAN card and photograph.

Investment Limits
Once you have the PPF account, you can deposit either a lump sum at a single time or an amount at any number of intervals. The upper limit for investments is Rs. 70,000 and lower limit Rs. 500 per year. This means that you have to deposit at least Rs. 500 every year to keep the account active. Other than this, there is no compulsion to deposit a fixed amount every year; one can adjust the amount depending on the situation in that year.

Lock in Period
PPF has a lock in period of 15 years. After 3 years, some conditional withdrawals are permitted, but the tax penalty will eat away the returns earned during this time.

Return on investment
The interest rate offered by PPF is 8%, compounded annually. As of now, the interest earned on PPF is tax exempt.

Advantages
Assured return on investment, safe instrument.
The interest earned is exempt from tax, though this could change.

Disadvantages
High lock in period
Individuals with high risk tolerance will find the rate of returns small compared to those offered by ELSS.

Smart Saver's Verdict
PPF is a retirement fund; hence the lock in period being high should not be looked at as a disadvantage. Secondly, even the most risk tolerant individuals need to have a fixed return component in their portfolio (in order to make it balanced) and PPF is a worthwhile candidate to consider. As of now, despite its high lock in period, PPF scores over the other fixed return instruments (like NSC, bank deposits) because the interest earned is tax exempt.

The only situation wherein a PPF investment will be ill advised will be when that money will need to be tapped before the end of the lock in period. Of course, unforeseen circumstances can appear in anybody's life, but I here am talking about people who do not have an emergency fund, or who have a major life event (child's education, marriage, home purchase, etc.) coming up for which they need to earmark funds.