Public Provident Fund

 In my opinion everybody should have a Public Provident Fund (PPF) account. Investing in PPF is an excellent way of saving, which also gives a tax deduction. But notwithstanding that, that is, even if one does not get any tax advantage by virtue of the fact that one is already claiming the maximum deduction of Rs 1.5 lakh available under section 80C, it still makes ample sense to invest in PPF.
Let me explain why.

Let’s take a look at the features of this account and its advantages.

The amount of deposit and the period of the account

 PPF is a fifteen year account. One must deposit every year for a minimum of fifteen years. This fact was responsible for this investment not to become very popular initially since many taxpayers found it more attractive to invest in National Savings Certificates which had a maturity period of only six years. But this was out of sheer ignorance about the various advantages of PPF.

The period of fifteen years is actually nothing to get concerned about, and, in fact, once a person gets acquainted with its advantages s/he actually starts wishing  that the account was of a longer duration. For this purpose it is permitted, on maturity, to keep extending the account by five years each time.

All that one is obliged to do is to deposit a minimum of Rs 500 each year, and it is possible to deposit up to a maximum of Rs 150,000. And the amount can be different each year. So this again is not a matter for concern, since in a particular year if one does not have sufficient disposable surplus, one needs only to deposit Rs 500 to keep the account alive. In fact if  somebody finds even Rs 500 to be high, one can deposit Rs 42 each month since the account allows up to 12 deposits each year, one per month.

And even if Rs 42 per month pinches, I suggest don’t deposit anything. But still open this account. What will happen if you do not deposit any money? The account will lapse. Let it lapse. If a few years later you realize the advantages of having a PPF account and if you open an account then you will have to wait another fifteen years for the account to mature. But if you open the account now, and it lapses, you can revive the account by depositing Rs 500 for each that you did not along with a penalty of Rs 50 for each year of default and the account gets revived.

I suggest, immediately after reading this article, please go and get a PPF account opened. If you open it now (that is anytime up to 31st March) there will be one more advantage. The PPF scheme follows the fiscal year (that is the period April 1 to March 31) as its accounting year.

Even if you open the account on 31st March, the next day one year will be over and only 14 years will be left.

For those of you who have not been investing in PPF  and instead choose something like NSC because of the duration, (money being blocked for 15 years in PPF versus only 6 years in NSCs), I think investing in PPF can be of even shorter duration than any other investment. How? You open this account and for the first 10 or 12 years deposit only the bare minimum amount that is required to keep the account alive. Now in the 13th year invest the maximum permissible amount. You will get all the advantages of investing in a PPF account like tax deduction, a pretty decent interest, tax exemption on the interest etc and will also get your money back in three years. The amount deposited in the 14th year will come back in two years and the sum deposited in the 15th year will come back in one year. I think it is worth opening the account just to take advantage of the 15th year of deposit. But I don’t suggest you do this. I think you should deposit a substantial amount each year and the real advantage of this account can be reaped if you do not withdraw the amount and let it accumulate over a number of years.

Again someone may worry, that the account is for fifteen years, and what if one is in dire need of money sometime within that period? This is also nothing to worry about since the account allows a loan to be taken after the third year and there is also a withdrawal facility after the sixth year.

Tax deduction, rate of interest and other benefits

 The amount invested in PPF account is eligible for a deduction under section 80C of the Income Tax Act, subject to the conditions of the section.

The PPF account currently earns interest at the rate of 8.1 per cent per annum (wef 1st April 2016), compounded annually. The entire interest earned is exempt from income tax under section 10 of the Income Tax Act, without any limits.

The entire balance in PPF Account is exempt from Wealth Tax. Earlier this exemption was not available to other deposits, but now even other investments and bank balances are exempt from Wealth Tax.

An account for a rainy day

 Amount saved in a PPF account is actually saving for a rainy day. God forbid, if bad days fall on someone, and debts have piled up, probably all the assets of the person may get attached. However, no court of law in India has the power to order attachment of balance in the PPF account.

Loan and withdrawal facility

Loan is admissible from the third year. The loan amount is limited to 25 % of the balance at the end of two preceding years.  Fresh loan is not allowed when previous loan or interest thereof is outstanding. Interest is charged at the rate of 1% if repaid within 36 months and at 6% on the outstanding loan after 36 months.

Withdrawal is permissible every year from the seventh financial year from the year of opening, limited to one per year.

Amount of withdrawal is limited to 50 % of balance at the end of the fourth preceding year or 50% of balance at the end of the immediate preceding year whichever is less. By ‘balance at the end of the preceding year’ is meant the immediately preceding 31st March.

Let me illustrate the withdrawal facility assuming you are depositing Rs. 150,000 each year.  I am going to ignore interest for the purpose of this calculation and will leave it to your imagination how much more attractive it will become if you take into account the interest too.

For the first six years withdrawal is not permitted. In the seventh year you can withdraw either 50 percent of Rs. 900000 (that is the balance at the end of the immediately preceding year) or 50 percent of Rs. 450000 (balance at the end of the fourth preceding year), whichever is lower. So the maximum permissible withdrawal would be Rs. 225000. In the eighth year the withdrawal would be 50 percent of the lower of Rs. 825000 or Rs. 600000 and so on.

Table 1
Year Opening Balance Deposit Withdrawal Closing Balance
1 0 150000 0 150000
2 150000 150000 0 300000
3 300000 150000 0 450000
4 450000 150000 0 600000
5 600000 150000 0 750000
6 750000 150000 0 900000
7 900000 150000 225000 825000
8 825000 150000 300000 675000
9 675000 150000 337500 487500
10 487500 150000 243750 393750
11 393750 150000 196875 346875
12 346875 150000 173438 323438
13 323438 150000 161719 311719
14 311719 150000 155859 305859
15 305859 150000 152930 302930

Now watch table 1 carefully. Do you see anything particularly attractive about it?

How much have you deposited each year? And how much is the amount of withdrawal each year after the 6th? The amount withdrawn is more than the amount deposited each year right up to the fifteenth year. In other words the out of pocket investment is nil. And, so far, I have ignored interest. If you take into account the interest, the amount that you are eligible to withdraw would be substantially more that what I have illustrated. Which means that all one has to do after the 6thyear is to go to the bank, withdraw the amount permissible, deposit out of the same amount Rs. 150,000, actually bring money home, and enjoy an income tax deduction. And this can be done right upto the maturity of the account

But I would not recommend that you do this. By all means do it if you are need of money. But if that is not the case, then I would rather you make fresh investment in the account each year. That is the only way you can take maximum benefit of the PPF account.

Now take a look at table 2. Imagine somebody opens a PPF account, deposits Rs. 150,000 each year and renews the account every 5 years after the initial 15 years. Let us see the interest that will be earned and the balance in the account after 5, 10, 15, 20, 30 and 35 years.

Table 2
Yearly Deposit Interest Rate
150000 8.1%
Yr Op Bal Deposit Interest Cl Balance
1 0 150000 12150 162150
2 162150 150000 25284 337434
3 337434 150000 39482 526916
4 526916 150000 54830 731747
5 731747 150000 71421 953168
10 2033331 150000 176850 2360180
15 3954655 150000 332477 4437132
20 6790805 150000 562205 7503010
25 10977368 150000 901317 12028685
30 17157334 150000 1401894 18709228
35 26279849 150000 2140818 28570667


At the end of 10 years the principal amount deposited is Rs. 15.00 lakhs and the closing balance  Rs 23.60 lakhs. After 20 years Rs 30.00 lakhs is the principal and closing balance Rs. 75.03 lakhs. After 25, 30 and 35 years the principal amount is Rs. 37.50 lakhs, Rs. 45.00 lakhs and Rs 52.50 lakhs and the closing balance is Rs. 120.28 lakhs, Rs. 187.09 lakhs and Rs 285.70 lakhs respectively.

Now you see why I was against using the amount withdrawn each year to make the deposit. As far as possible deposit a fresh amount and the amount should stay in the PPF account for as long as possible.

A person who opens a PPF account at the age of say 25 years (soon after s/he starts earning can easily deposit in the account for 35 years or even more.

One of the finest gifts parents can give to their child is a PPF account which was opened in the child’s name soon after birth. The parents can deposit the money for the first 20 to 25 years of the child’s life and thereafter the child starts depositing in the account till the age of say 60. Can you imagine the amount that would have been accumulated.

I have always felt, that if one has systematically deposited in a PPF account, starting relatively early in life, even if no other retirement planning has been done, this account alone can suffice.

In table 2, at the end of 35 years the closing balance is about Rs. 2.85 crores and the interest is about Rs 21.40 lakhs. If this account had continued for 40 years the balance would have been much more (a little over Rs 4.31 crores) and the interest per annum over Rs. 32.31 lakhs. Now imagine a couple, both of whom had a PPF account, which at the time of their retirement has been active for 35 to 40 years, each having a closing balance of anywhere between 2.85 crores to 4.31 crores,  earning interest per annum of, say, anywhere between 21 lakhs  to 32 lakhs. By the time of retirement most family responsibilities have been taken care of, the children have been married, the house and the car are already there. Even if the two simply withdraw the interest component that works out to about Rs 5.33 lakhs per month,   the principal amount is safe and untouched which is their nest-egg, and the entire amount withdrawn is tax-free.

Now I know your immediate reaction is going to be “What if the laws change?”, or “What if the scheme gets discontinued?” or “What if the tax exemption is withdrawn?” All I would like to say is, since one doesn’t know the future, one can only plan on the basis of what is applicable today. Personally, I have been strongly advocating this account for over 20 years now. And these questions were posed even 20 years ago. Till date the account is still there. Only the interest rate got revised from 12 percent to 8.1 percent. All other features have actually become more attractive. Earlier there was a 1 percent service charge on withdrawal, now there is none. Earlier extension was permitted for five years at a time only for three times. Now there is no restriction. And, of course, it would be a pity, if one does not take advantage of this account by being skeptical and what if 30, 40 years later the account, in all its glory, is still around.

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