With interest rates on taxable fixed income products coming down, PPF remains an attractive alternative for allocating the debt portion of one's investment portfolio. Currently, PPF investment is earning interest at the rate of 7.6% p.a. (interest rates are subject to reset by the government on a quarterly basis.)
Even after several years, Public Provident Fund (PPF) continues to be one of the most favored investment avenues for many investors. The principal invested and the interest earned from it enjoys a sovereign guarantee. Also interest is tax-free in the hands of the investor under section 10 of the Income Tax Act, 1961. The principal invested in the PPF qualifies for deduction under Section 80C of the Income Tax Act, 1961.
With interest rates on taxable fixed income products coming down, PPF remains an attractive alternative for allocating the debt portion of one's investment portfolio. Currently, PPF investment is earning interest at the rate of 7.6% p.a. (interest rates are subject to reset by the government on a quarterly basis.)
PPF is a 15-year scheme, which can be extended indefinitely in block of 5 years. It can be opened in a designated post office or a bank branch. It can also be opened online with few banks. A person of any age can open a PPF account.
One can deposit a maximum of 12 times in a year, but remember to deposit before the 5th of the month to get interest for the or the full month, as the interest is allowed on the lowest balance at the credit of an account from the close of the 5th day and the end of the month.
At the end of the maturity period, an investor has to decide where to deploy the money. PPF has a limit of Rs 150,000 per year and hence the entire maturity proceeds cannot be invested in fresh PPF account. One option is to extend the account in the pre-defined block of 5 years post maturity. The investor can continue making further contributions or merely stay invested with his/her accumulated investments till date.
The investor can continue fresh deposits in his account during the extended period in the same fashion as during the original 15-year period. However, the Account Office has to be intimated in writing by filing up the Form H. If one keeps depositing without furnishing this Form, then all new deposits will be treated as irregular and no interest will be paid on them. Also, the benefits of Section 80 C of Income Tax Act will cease to apply to these deposits.
The investor can continue his PPF account without making any further contributions and the investor can continue earning tax-free interest from the same.
Unlike the initial period of Public Provident Fund Account where loan facility is available from the third year and partial withdrawals are allowed only from the sixth year onwards, in extension period PPF is more liquid. If someone has opted for extension of the account without contribution, one can make one withdrawal in each financial year of any amount within the balance. The balance continues to earn interest.
But, if one has opted for extension of the account with contribution, then during the extension period, only one partial withdrawal is allowed by applying through Form C, subject to the condition that the total of the withdrawal during the 5 year block period, shall not exceed 60% of the balance at the credit at the commencement of the extended period.
This amount can be withdrawn either in one instalment (one year) and or more than one instalment in different years as per requirements. Similarly, during the second block period of 5 years, the subscriber can withdraw 60% of the whole amount at credit at the commencement of the second block period either in one year or in different years not exceeding one withdrawal a year. This limit of withdrawal will apply on commencement of every extension of block period of 5 years.
While PPF is quite a tax efficient option for investment (especially compared to debt funds), it suffers in terms of liquidity constraints and lower returns as compared to equity schemes.
Compared to PPF, ELSS is an option which carries lower lock-in and potential of higher returns, although with some volatility in the short term. Whether or not the investor has already exhausted his maximum limit of deduction u/s 80C (before PPF or ELSS investment), then he/she may consider investing in equity mutual fund schemes if he is not in the need of regular income from his investments. Investments in these schemes are tax deductible and since these are pure equity schemes, the returns earned from such schemes can exceed the interest earned from PPF over the medium term, though with some intermittent volatility.
The investor can also utilize this PPF amount on expiry of first 15 year period (if he has more than 5-10 years of working life left when he can rebuild his PPF account) to pay off any existing interest-bearing liabilities like home loans, education loans etc. The average interest on home loans is between 8.5% and 9% p.a. While interest cost is tax deductible u/s 80C, if the investor has already exhausted his limit (before accounting for tax on interest), he/she can save his/her interest outgo every year by paying off the loan by utilizing the PPF amount.
For investors who are wary of volatility and are in need of regular income, the PPF maturity proceeds can be invested in tax free bonds or less volatile debt mutual funds, though the post-tax returns may not match the PPF return in every period.
In conclusion, an investor can extend his PPF account beyond maturity if he desires safety of principal, decent regular tax-free income or diversification of his/her overall portfolio. On the other hand, he/she can deploy that sum in higher yielding assets like equity or pay off existing high-interest liabilities by thus saving on those annual costs. The utilization of the PPF amount depends upon the investor's goals and priorities given his financial situation at the time of making the decision.
Deepak Jasani is Head of Retail Research at HDFC Securities
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