Get to know about Public Provident Funds(PPF)

Today we have a variety of fixed income instruments to consider. Bank fixed deposits are popular. There are several other alternatives including Infrastructure bonds, Post office Monthly Income Scheme (POMIS), Kisan Vikas Patra (KVP), National Savings Certificate (NSC), Provident Fund etc. We would like to profile a popular instrument – Public Provident Fund (PPF).

Overview:
PPF is a scheme started by the government of India in 1968. It encourages the public to save money for the long term. Generous tax breaks are available and it is currently the only instrument enjoying EEE benefits (tax exemption on the initial amount invested, interest which accumulates and the final amount which is withdrawn). It is also exempt from wealth tax.

1. The annual interest rate is reviewed on an annual basis. The current rate is 8%.
2. The minimum amount to be invested is Rs 500 per year and the maximum is Rs 70,000 per year.
3. There is a lock in period for fifteen years. Partial withdrawals are permitted after five years. It is also possible to take loans for the partial amount after one year.
4. After 15 years from the date of making the initial deposit, the depositor can opt for extension of the PPF account for a further period of 5 years.

PPFAdvantages:
1. Tax breaks - The product offers great post tax returns. To obtain 8% post tax returns, we need to invest in instruments which offer 11%+ pre tax returns (for those in the 30% tax slab). Risk free instruments offering such returns are not readily available.
2. Safety - Since the product has government backing, it has the highest safety.
3. Flexibility – We can invest what we can spare each year. It offers flexibility to investors to manage liquidity surplus/shortfalls. Suitable for those who have non-regular incomes as they can deposit part of their one-off income here, with a minimum amount of Rs500 every year.
4. Reach – Easy access for the product through the SBI office/post offices.
5 Nomination facility is available on PPF deposits.

Disadvantages:
1. Flexible returns – The annual interest rate varies depending on the government decision. In the last decade interest rates where as high as 12%, in line with the market rates.
2. Lock In- There is a lock in for fifteen years. While the withdrawal/loan provisions provide partial mitigation the funds are still locked in for fifteen years.
3. Documentation – Careful scrutiny of the pass book entries is required. Manual ledger entries are posted, which are prone to errors.
4. NRI’s cannot open a PPF account. Therefore, if you are planning to go on a long term trip which would make your residential status as "NRI", it is better to open an account before you leave the shores of India.

Points of Interest:
1. Minimum investments are required each year. While exceptions are possible it makes sense to invest at least the minimum amount.
2. Investing in the beginning of the month before 5th day is advisable to get higher interest.
3. While the individual limit is Rs 70,000 per year, it is possible to open separate PPF accounts for self, spouse and the HUF (more on HUF’s later)
4. Goal centric planning is possible – The lack of liquidity can be used to plan investments for a long term goal like children’s education.
5. NRI’s can continue to invest in PPF accounts opened prior to getting their residential status changed to NRI only on a "non-repatriation" basis.

Summary:
PPF is a great savings instrument for those in the highest tax bracket. It offers a combination of unmatched security, excellent returns and flexibility. It also inculcates a regular savings habit. If we park a portion of funds which are not required immediately then the lack of liquidity is a blessing as it allows the corpus to accumulate.

We strongly urge readers to open a PPF account at the soonest. While it does not have the glamour of equity or real estate investments, systematic savings in this risk free security will help us in the long run.