PPF is my favourite tax-saving investment.
In fact, I like PPF so much that I would invest in PPF even if it didn’t offer any tax benefit under Section 80C.
In this post, I will share the reasons for my preference for PPF.
#1 PPF is an excellent fixed income product.
Apart from EPF and PPF, there is no product that offers you tax benefit on investment and tax-free and risk-free returns. And I don’t have EPF.
Compare PPF returns against the post-tax returns from a bank fixed-deposit or a government bond. PPF will be the likely winner.
Thus, PPF is an automatic choice for long term fixed income portfolio.
Between EPF and PPF
- You must be a salaried employee to contribute to EPF (that rules me out). On the other hand, anyone can contribute to PPF.
- Both PPF and EPF are EEE products. However, interest on EPF contributions exceeding Rs 2.5 lacs per annum is taxable.
- EPF usually offers a better return than PPF.
- EPF account can only be continued until your retirement. The interest during the non-contributory period becomes taxable (even before retirement). In certain cases, the EPF account can become inoperative and such accounts don’t even interest. Here is a good primer by Sreekanth on how EPF interest is taxed if you don’t contribute.
- PPF account, on the other hand, can be continued for life. And you earn tax-free interest until you withdraw.
#2 You can’t invest more than Rs 1.5 lacs per annum
If you skip investing in PPF this year, you CANNOT make up for the missed investment in the coming years. The maximum investment is capped at Rs 1.5 lacs per financial year per adult.
Contrast this with other tax-saving products like ELSS, where there is no upper cap on annual investment. You can even put Rs 20 lacs in a year.
If your portfolio asset allocation permits, you can also invest in PPF in the name of your spouse and kids. Between you and your spouse, you can put a total of Rs 3 lacs per financial year.
Note that every minor’s PPF account must have a guardian. And the PPF rules are a bit tricky here.
In a financial year, you cannot invest more than Rs 1.5 lacs cumulatively in your PPF account or those PPF accounts where you are the guardian. The excess amount does not earn any interest.
Hence, if you are the guardian in your daughter’s PPF account and put Rs 1 lac in your PPF account in the April, you cannot put more than a cumulative of Rs 50,000 for the rest of the year in your and your daughter’s PPF account.
You might ask, what’s the point of opening PPF accounts for kids then?
The restriction is only until the kids are minors. Once your daughter becomes an adult (18 years), her PPF account shall count as a separate PPF account. And you (and your daughter) can contribute 1.5 lacs + 1.5 lacs = 3 lacs to PPF accounts.
Additionally, by opening the PPF account early for kids, you begin the countdown to initial maturity of 15 years early. And this brings us to the next point.
#3 PPF becomes super flexible after initial maturity of 15 years
It is not easy to withdraw from PPF during the first 15 years. However, once the account completes 15 years, the withdrawal restrictions go down sharply.
By the way, you do not have to close the PPF account after completion of 15 years. You have an option of extending your PPF account in blocks of 5 years. And you can do this any number of times. This means you can continue the PPF account for life.
Depending on your preference, you can extend the account in blocks of 5 years with or without contribution. “Extension without contribution” is the default mode. The balance and subsequent contributions continue to earn interest until withdrawn.
If you extend without contribution, you can withdraw any amount (even 100% of the balance) at any point in time. Just 1 restriction. 1 withdrawal per annum.
If you extend with contribution, you can withdraw up to 60% of the outstanding balance at the time of extension over the next 5 years. 1 withdrawal per annum.
A smart investor can also use PPF as an excellent pension tool.
Note: About my assertion that I would invest in PPF even if it didn’t offer any tax benefits, this may already be happening in your case. Tax benefit under Section 80C is capped at 1.5 lacs per annum. Therefore, if you contribute to EPF, repay principal on housing loan, or pay life insurance policy premium, your Section 80C quota may already be full. In such a case, any PPF investment won’t fetch you any tax benefit under Section 80C (or comes from your post-tax income). If you still invest in PPF, you invest because of merit in the product.
My favourite tax-saving investment is PPF. Which is yours?