I finally opened a PPF account today with HDFC bank. I always felt that I had enough avenues for an 80C deduction, not understanding what I was missing out on.
For the uninitiated, PPF is Public Provident Fund - a Government small savings scheme for which the Government notifies interest rates every quarter. This interest rate is usually higher than FD rates, but lower than EPF (Employee Provident Fund) rates. It is what is called "Exempt-Exempt-Exempt" investment. What that means is: The money we invest qualifies as an exemption under Sec 80 C. Interest credited/earned every year is not taxable. The final withdrawal isn't taxable either! One person can only have one PPF account (even if another one has been inactive for awhile). The maximum investment in a financial year in INR 1.5Lacs
What I missed out: I computed what I missed out in the last 15 years - I am sadistic that way. If I had invested 1.5Lacs on April 5th of every year from 2007-2021 , I would have been able to have a tax free amount of INR 46.25Lacs in April 2022. That was a cool 7.9% XIRR. because the interest rates fluctuated in that time period going upto 8.8% at times!!!
Okay. No point in crying over spilt milk. Moving on...
What it gives you: Decent returns - 7.1% is the current going rate of PPF accounts. Bear in mind that is fully tax free. You will need to make 10% returns pre-tax in any other mode of investment to get the same investment. And it is "risk-free". Interest is calculated based on lowest monthly balance between 5th and the last working day of the month. But the credit is annual, at the end of the year. Here is the official site
What it does not give you: Liquidity! You lock yourself in for 15 years. You have some partial withdrawal and loan options after 5 years, but this is not an avenue of saving/investment for money you want to park with a liquidity option. It does not give you tax exemption if you already have EPF contribution or ELSS or other investments that total up to the Section 80C exemption limit.
What I learnt very recently (so recently, that I updated this blogpost 3 months after posting it originally):
A PPF account matures on after 15 years from the end of the financial year of opening. This rule works like this: if you opened the account between 1st April and 31st December of Year 20XX, the account will mature on 1st April of 20(XX+16). So in the example I took earlier, my hypothetical account opened in April 2007 would have matured on 1 April 2023, though my balance calculations for april 2022 is still valid.
Dos and Dont's:
Do open an account online if you want to avoid the hassle of physical paperwork. This will work with ICICI, SBI, HDFC and Axis Bank for customers who already have a bank account. Most commercial banks are allowed to open PPF accounts, but not all offer online options.
Do keep the passbook safe. Even an account opened online with HDFC Bank gets a physical passbook. This passbook will be needed if you want to transfer your account to any other Bank.
Do fund the account on the 5th of each month (if you plan to contribute annually), if not - contribute the full amount on April 5th each year
Do consider opening accounts in your minor children/spouse/parents' names if you want risk free investment. Your investment in your children's names can be used for availing Sec 80C exemption, but it is unlikely that you will use it if you have PPF contribution in your own name
Do not forget to make the minimum contribution in any year. If not, you end up paying a penalty of INR 50/- per year you miss. But more importantly, the bank will not give you the opportunity to pay beyond INR500 for every year missed. Its a big missed opportunity
Do not try to open multiple PPF accounts. I am not sure what happens, but I am sure it isn't a good idea.
My 2 cents - if you have a habit of parking funds in FDs over a period of time, you might as well park it in PPF. In fact I would park INR 1.5Lacs every year regardless of your risk appetite. Just forget about liquidity though.
PS: There is no direct exclusion or inclusion mentioned about DICGC coverage of PPF funds. My interpretation is that PPF funds are not bank deposits, but deposits with the central government, and that category is explicitly excluded by DICGC. Which means, you can have PPF accounts with any bank and not worry about safety of the funds! Yay!
Do you have a PPF account?
No
Yes, and it is active
Yes, but it is inactive
No, but I intend to start one