PPF Benefits: Advantages of Investing in a PPF Account

Public Provident Fund (PPF) is one of the most popular long-term saving schemes which focuses on inducing small savings like investments and accrue returns on the same. As a saving scheme by the government, PPF gives an agreeable rate of interest and returns on investments. This scheme tends to serve as a prerequisite for financial requirements at the time of retirement. It has a tenure of 15 years which, however, can be extended in blocks of  5 years on application by the subscriber. Partial withdrawal is also allowed in some cases.

PPF has a number of benefits in terms of interest rates, safety, and taxation. It also allows loans and partial withdrawals after a few years of opening the account. In this article, we give you the key benefits and some disadvantages of PPF.

Benefits of PPF (Public Provident Fund)

PPF Interest Rate 2024

The rate of interest for PPF accounts is revised by the Central Government every quarter. The PPF interest rate has historically been around 7.6% to 8%. It tends to move slightly higher or lower depending on the overall economic scenarios.

The current interest rate for Q3 (October-December) FY 2024-25 for PPF accounts has been fixed at 7.1%, compounded annually. As compared to the corresponding fixed deposit (FD) rates in many banks, Public Provident Fund gives higher interest benefits to its subscribers.

Extension of Tenure

PPF has a tenure of 15 years for the subscribers after which they can withdraw the amount which comes under tax exemption. However, the subscribers can also apply for an extension to get another 5 years of active investments. And, they can also choose whether they want to continue with the contributions or not.

Tax Benefits on PPF

The Public Provident Fund provides tax benefits under Section 80C of the IT Act, 1961. It allows income tax deductions up to Rs.1.5 lakh on the amount invested in the scheme. PPF follows the EEE (Exempt-Exempt-Exempt) model of taxation which implies that the interest earned and the maturity amount both are exempted from taxes. 

Investment Security in PPF

Being a government-backed saving scheme, the subscribers enjoy the safety of investments in Public Provident Funds.

• Generally, the people who are reluctant to take any risks and benefit from a fixed rate of interest opt to invest in Public Provident Fund
• The interest earned is backed by a sovereign guarantee which also makes it safer than bank interest
• In comparison, bank fixed deposits are only insured up to Rs 1 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC)

Facility of Loans against PPF

The subscribers are allowed to take loans against their PPF account at an agreeable interest rate. The loan benefit can be availed from the 3rd to the 6th year of account opening. It is especially beneficial for investors who want to apply for short-term loans without having to pledge any collateral securities.

1. The maximum amount of loan that can be availed against PPF accounts is 25% of the balance at the end of the 2nd financial year preceding the year in which the loan was applied for
2. The loan amount can be repaid in 36 months from the first day of the month succeeding the month in which the loan was taken. For example: if a loan is sanctioned on 25th March 2020 then the tenure of repayment will start from 1st April 2020

For instance, if the investor wanted to take the loan in April 2020, the maximum loan that can be availed is 25% of the balance as on March 31, 2019. The interest rate payable on loans taken against PPF accounts is 1% p.a. if the loan is repaid within 36 months and 6% p.a. in case the loan is repaid after 36 months. This interest rate is lower than the interest charged by several banks and you do not need any additional security.

Partial Withdrawals

The PPF is a long-term investment scheme with a lock-in period of 15 years. However, Partial withdrawals can be made from the 5th financial year after the year in which the account is opened. For example, if the account was opened on Feb 15, 2013, withdrawal can be made from the financial year 2018-19 onwards.

Only one partial withdrawal is allowed per financial year. The maximum amount that can be withdrawn per financial year is the lower of the following:

1. 50% of the account balance as at the end of the financial year, preceding the current year, or
2. 50% of the account balance as at the end of the 4th financial year, preceding the current year.

Form C should be submitted to withdraw a partial amount from the PPF account.

• Details such as account number, amount of money to be withdrawn, etc. are to be mentioned in the form
• A declaration stating that no other amounts were withdrawn during the same financial year should also be submitted
• In case, the account is in the name of the minor, additional declaration stating that the amount is required for the use of a minor child who is still a minor and is alive
• Passbook is also required to be submitted along with the form

Related Read:  PPF Withdrawal Rules: How to Withdraw Your Partial & Complete PPF

PPF as a Pension Tool

PPF can be treated as a good Pension scheme if a subscriber extends the scheme tenure without opting for further contributions. Let us assume that you have Rs. 1 crore in your PPF account.

• The PPF interest rate is 7.1% per annum which implies that your account will earn Rs.8.5 lakh interest income in a year (tax-exempted)
• Now, you can withdraw this interest income keeping the principal amount the same
• Similarly, if the interest rate remains the same, you will be able to earn 8.5 lacs of interest (or you can say pension) per year

As far as the different pension plans or annuity products are concerned, the pension income is taxed according to the income tax slab. But, in the case of PPF, there is no tax to be paid. Thereby, it can be considered better than other pension schemes/plans.

Transparency in Calculation

The PPF amount is compounded on an annual basis according to the declared interest rates.

• PPF account interest rate of interest is declared every quarter so the applicable rate for PPF benefits will be the weighted average of each rate
• The amount your PPF account earns depends on the declared interest rate and when you have deposited money in the PPF

For example, assume you have invested Rs 75,000 in the PPF account on 4th July 2018 and Rs 75,000 on 4th October 2018. The rate for April – June 2018 is 7.6% and the rate for October – December 2018 is 8%. Your PPF account will earn Rs 4,275 on your initial investment of Rs 75,000 (7.6% for 9 months) and Rs 2,850 (8% for 6 months) on your subsequent investment of Rs 75,000.

Few Disadvantages of PPF

Fixed Interest Rate: PPF investments have a fixed interest rate which may not always keep pace with inflation. In 2010 and 2011, inflation went into double digits but the PPF interest rate remained at 8%.

Lower returns than Mutual Funds, NPS: Mutual Funds and NPS have an equity component and hence have given higher returns than PPF in the long term.

Less flexible: PPF has limitations on withdrawals. It allows withdrawals from the 7th financial year after the year of account opening. Thereafter it only allows partial withdrawals up to 50% of the balance in the PPF account. In terms of loans, there are similar restrictions such as when it can be taken (3rd to 6th year from account opening) and how much (25% of the account balance in the 2nd year preceding the year of account opening).