When it comes to saving taxes, the
Public Provident Fund (PPF) is one product a lot of people turn to
tax-free yearly interest and the annual compounding. Since the PPF has a long
tenure of 15 years, the impact of compounding is huge, especially in the later
Further, because the interest earned is
backed by sovereign guarantee, it makes it a safe investment. Therefore,
linking one’s investment in PPF to a long term goal such as retirement helps.
Here’s how to go about it.
Earnings in PPF
The interest rate on PPF is set by
the government every quarter based on the yield (return) of government
securities. In 1968-69, PPF offered a 4 per cent per annum interest, while from
1986-2000 it offered 12 per cent. The current interest rate for October 1 to
December 31, 2018 is 8.0 per cent per annum.
While the minimum annual amount required
to keep the account active is Rs 500, the maximum amount that can be deposited
in a financial year is Rs 1.5 lakh. As there is a cap on PPF’s annual
investment, you will need other investments such as equity-linked savings
scheme (ELSS) to shore up your retirement corpus.
By investing a maximum of Rs 1.5
lakh every year for 15 years in PPF, at an average interest rate of 7.6
percent, the corpus becomes nearly Rs 42.5 lakh. In PPF, the power of
compounding works best over the long term. It also means, one should put in the
maximum possible in the initial years so that the funds get time to compound
Let’s say someone invests Rs 1 lakh
annually for 15 years, then the corpus adds up to almost Rs 28.5 lakh, at an
average interest rate of 7.6 percent per annum. Of the corpus, the interest
amounts to about Rs 13.5 lakh, nearly 47 percent.
only for the first 10 years (minimum of Rs 500 put in to keep account active)
and the funds were left to grow till the end of the 15th year. The corpus will
be nearly Rs 22 lakh, the interest portion amount to nearly 55 percent. Even
without fresh contributions, the interest gets added each year on the previous
year’s balance and thus compounding takes place.
withdrawals avoid dipping into the corpus, else the purpose of compounding gets
defeated. Use it as the last resort if you are hard pressed for funds.
On maturity of PPF
You need not close your PPF account
on expiry of 15 years from the end of the year in which initial subscription
was made. They can be extended indefinitely in a block of 5 years, with or
without making fresh contributions. To meet regular income needs, one is
allowed to make partial withdrawals once a year during the extended period.
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PPF and ELSS
PPF is a debt product and it
generates a steady income flow. A product that it is often compared to is the
ELSS, a tax-saving equity mutual fund. As the underlying securities in both
asset classes are inherently different, the return generated will also be
ELSS is a suitable option for those investors who are comfortable with
volatility that is inherent in equity investments. On the other hand, since PPF
is a debt-oriented investment where one’s savings are not exposed to equity, it
will suit those who is looking for a steady growth in savings, not necessarily
a high return.
What you should do
PPF suits those investors who do not
want volatility in returns akin to equity. However, for long-term goals and
especially when the inflation-adjusted target amount is high, it is better to
take equity exposure, preferably through equity mutual funds like tax-saving
Comparing them, however, is not
warranted as both PPF and ELSS belong to different asset classes, with one
currently generating around 8.0 per cent returns as compared to the other
generating (historical returns) around 12 per cent return. The latter, will
anyways have a higher maturity corpus (with relatively more volatility) than
the former (with relatively less volatility.) Diversifying one’s savings in PPF
and equities would serve the purpose rather than relying entirely on just one