All you want to know about Public Provident Fund (PPF)

Public Provident Fund popularly known ass PPF account is among the most popular instrument for savings used by Indian Investors. The Scheme offers good returns with safety along with EEE Tax benefit.

How PPF was introduced

At the time and age when savings or wealth management didn’t really mean mutual funds and tax free bonds, the Central Government of India came up with the Public Provident Fund Scheme. Public Provident Fund is a scheme that brought itself as a savings cum tax saving instrument, in India, introduced by the National Savings Institute of the Ministry of Finance in the year of 1968. The Central Government, since its beginning, by notification in the Official Gazette, made amends in the scheme.

The primary motive of this scheme is to mobilize small savings by offering an investment with reasonably decent returns along with income tax benefits. There is minimal to no risk at all as this scheme is backed and guaranteed by the Central Government.

More about Public Provident Fund Scheme (PPF)

The Public Provident Fund scheme comes with a lock in period of 15 years. So this scheme just generally encourages savings among the masses of the country and in turn builds a safety net for life after retirement. Not to forget, the Public Provident Fund Scheme is still one of the most tax efficient yet safe savings schemes in the country of India.

The Public Provident Fund offers safe yet attractive and decent interest rate and the returns are fully exempted from tax. A subscriber can invest a minimum of Rs.500 to a maximum of Rs. 1,50,000 and can get special facilities of loan, account extension, etc.

The period from April 1st – March 31st, which means a complete financial year is considered to be a deposit year for a PPF account. E.g. for an account which opened in October 2016, Year 1 will be April 1st 2017 – March 31st 2018.

The interest rates for the PPF scheme are set and announced by the government of India. The interest is calculated for a financial year according to the rate announced for the said year. Unlike Fixed Deposits the rates of interests aren’t fixed for the entire tenure of the account holding. The maximum amount for deposition in the account is also subject to change.

The rate of interest for PPF accounts at present is 7.6% per annum.

Let us now list down and discuss the unique features of the Public Provident Fund Scheme.

• The interest rates for PPF Scheme at present are 7.6% per annum.
• The initial deposit in PPF Scheme is only of 100.
• The maturity period of a particular PPF account is of 15 years.
• The Annual Deposit amount that should be deposited in PPF account is Rs500- Rs.1,50,000.
• The frequency of the deposit will be of every year, continued for 15 years.
• The interests earned are tax free and the deposits made are subject to tax exemption under Section 80C.
• The facility of Nomination is allowed.
• The facility of having Joint Accounts is not available under this scheme.
• The facility of taking loans against the PPF account starts from the third financial year.
• The facility of partial withdrawal starts from the seventh financial year. Withdrawal of the entire amount is possible only at maturity.
• The deposits can be made via cash, Demand Draft, cheque or online fund transfer.
• The PPF account can be extended for another additional five years within the period of a year.
• The accounts can be transferred between two or more people
• The funds held by the account can also be transferred between bank branches and post office free of any cost.
• Since the Public Provident Fund Scheme was introduced at a time when the application and other processes were conducted in post offices, there have been specific Forms for PPF; where each Form serves a specific purpose.

Here is the list of PPF Forms with their purpose:

• PPF Forms
• There are various forms pertaining to PPF accounts. Find here these different forms along with the pupose specified for the same.
• Form A – To open a Public Provident Fund Account (PPF Account)
• This form is used for New Account opening that requires details like Name, address, Pan number along with duly filled and signed form. While opening an account for minors, one also need to specify the name of guardian along with relationship with applicant. You may also specify the amount depositing in the account at the same time.
• Form B – This form is for depositing money whether you are depositing in your account or repaying loans taken from PPF account. Also penalties levied for inoperative account may be paid through this form. The payin slip should also mention the amount deposited through cash, cheque, draft or net bank transfers. In case, the amount is deposited through agent, then the details of agents like agent name and code also need to be mentioned.
• Form C – To make partial withdrawals from a PPF account
• Certain sums of money can be withdrawn from the account from year 7 of opening the account. This form is an application to withdraw such amounts. The form requires the applicant to fill in the account number and the amount to be withdrawn as well as a declaration stating no other amounts were withdrawn during the same financial year.
• Form D – To request a loan against a PPF account
• Account holders can utilize the loan facility provided under the scheme from year 3 to year 6 of an active account. Details to be specified are the PPF account number, the amount being borrowed and an undertaking that the amount will be repaid with interest within 3 years as per the rules.
• Form E – To add a nominee to a PPF account
• More than one person can be nominated for a single PPF account. The names of such persons, along with their addresses and relation to the account holder have to be specified in the form. In case more than one nominee is stated, the percentage of funds that can be claimed by each nominee will have to also have to be specified. Nominations cannot be made for minors’ PPF accounts.
• Form F – To make changes to PPF account nomination information
• This form is to be used to cancel or alter nominees for a particular PPF account. The account holder will have to specify when the nominee being canceled/replaced/altered was named so. Nominees can be added, removed at any time during the PPF account tenure. The percentage allocated to each nominee can also be altered.
• Form G – To claim funds in a PPF account by a nominee/legal heir
• When an account holder dies, those whom he/she stated as nominees or his/her legal heirs can claim the amount in his/her PPF account. To do so, Form G will have to be filled out with required details such as the name(s) of the nominee(s)/heir(s) of the account holder. The form asks for confirmation from the claimant that the death certificate of the account holder has been enclosed.
• Form H – To extend the maturity period of a PPF account
• The standard tenure for a PPF account is 15 years after which the investor can withdraw funds held therein, completely and freely. However, if a PPF account holder wishes to extend the term of the account beyond 15 years, he/she can do so for a further 5 years by submitting this form. The account number and date of account opening will have to be specified.

Considering the time and motive of the PPF scheme, which is, to get the masses of the country, which includes people from people from all walks of life and from different economic backgrounds, into the habit of saving; we can say that it is justified that the application and management processes of this scheme is handled by the Post Office and Public Sector Banks mostly.

Here is the list of banks where you can open a PPF account.

Advantages of Public Provident Fund

• Low or no risk- The Public Provident Fund scheme is introduced, backed and guaranteed by the Central Government of India and hence the risk factor in this particular instrument ranges from minimal to zero.
• Attractive long term returns- The interests earned are compounded every year with a lock in period of 7 years and maturity period of 15 years. If we have to look at the tax benefits and rate of interest earned, then we can rightfully say that it is way better than bank FD’s and other tax saving schemes in terms of long term returns.
• Safety Net for Retirement- the PPF guarantees safety, capital protection, and compounded and attractive tax free returns after long tenures; which act as a cushion of comfort or as a safety net for life after retirement.
• Accessibility- PPF accounts can be opened at any nationalized public banks and very few private banks, and post office. Online facility is also available, which makes it easy for people from all walks of life to access and manage their accounts.
• Tax free returns- The interest earned on the PPF account are free of any taxes and the deposits and withdrawals are also tax deductible.
• Free from Attachments- The claims of the PPF account are not subject to any laid claim by creditors or court orders.

Essential Rules and Regulations regarding PPF

The criteria of eligibility for opening a PPF account, its opening process, documentation, withdrawal or extension process; involves a handful of rules and regulations. Here are a few guidelines regarding the same.

Eligibility criteria for opening a PPF Account

• Any resident Indian can open a PPF account.
• The minimum age for opening a PPF account is 18yrs. There is no maximum or upper age limit when it comes to opening or holding a PPF account.
• Only one PPF account can be opened for one person; accounts can also be opened for minors.
• Non Resident Indians (NRI’s) are not allowed to open a PPF account.
• Hindu Undivided Families (HUF) is not allowed to open a PPF, in effect since 2005.
• Foreigners are not allowed to open a PPF account.

Documents required for opening a PPF Account

The documents required for opening a PPF account are basically KYC (Know Your Customer) documents like

• Address Proof and Identity Proof, in the form of, Passport, Aadhar Card, Pan Card, Voter’s ID card, Driving License, Rental agreement, a signed cheque.
• Passport size photographs.
• The Account Opening Form, i.e. FORM A.
• The nomination form, if nominees are being named at the time of the opening of the PPF account.
• If the account is opened on behalf of a minor resident Indian, then the age proof of the minor in the form of a birth certificate has to be produced at the time of opening the PPF Account.

Different Banks may ask you to produce additional documents in compliance with their own policies. In any case, the above mentioned documents are inevitably important when it comes to opening a PPF account.

Brief explanation on How to Open a PPF Account

PPF accounts can be opened through three mediums:

• Post Office
• Bank Branches
• Online via Internet Banking

For Banks and Post Office- Accounts were opened at Post Offices in places sp remote where the banks hadn’t reach. Anyway, the PPF Accounts were from the very beginning opened at both Post Office and Banks. So an individual who wishes to open a PPF can visit a Post Office or Bank that has been authorized to serve this facility and obtain the Forms required to open an account and submit the documents required(as mentioned earlier). An initial deposit of Rs. 100 is required to be made while opening the account.

Online via Internet Banking- A PPF account can be opened by visiting a Bank or any other third party financial service provider’s website and submitting the relevant and required forms. When you open an account with a bank, you are subject to follow the rules and guidelines of that particular bank. Because of the ease and convenience of opening a PPF account online, a new batch of investors has started investing in the PPF Scheme.

Interest Rates of the Public Provident Fund Scheme over the years:

The Central Government issues the interest rate for the Public Provident Fund Scheme at the beginning of each financial year. At present, the rate of interest for the PPF Scheme is 7.6% per annum.

Following is the list of the rate of interests for the PPF Scheme over through the last sixteen years

The interest for the PPF Scheme is calculated according to the rate announced for a particular financial year i.e. the rate does not remain fixed for the entire tenure. Every financial year, the interest is compounded annually and credited at end.  E.g. Considering the table above, if the account was opened in the year 2011 – 2012, interest would have been calculated @ 8.6% per annum for the first year, @ 8.8% per annum for the second year (2012 – 2013), @ 8.7% per annum for the third, fourth and fifth year (2013 – 2014, 2014 – 2015, 2015 – 2016).

Deposits should be made between the 1st and the 5th of any month in order to maximize returns. This is because the amounts deposited into the concerned account before the 5th of any particular month are considered for calculations.  E.g. if an account shows a balance of Rs.70, 000 on Sept. 1st and a deposit of Rs.50,000 is made on Sept. 7th, interest will be calculated on Rs.70,000 for the month of September not Rs.1,20,000.

The interests earned on amounts held in PPF accounts are tax-free, which acts as a major luring factor for investors looking for maximizing their returns. The interest rate has, over the past decade, been within the 8% p.a. mark. With no major fluctuations in rates of interest, it is a stable option for low risk investors.

Factors affecting PPF Interest Rates

The Central government of India, based on prevalent economic conditions, ascertains and announces the interest rate of the PPF. It is supposed to be set in line with or above the inflation rates at a premium of a quarter or half per cent (0.25% to 0.50%) on the rates of 10 year-government bonds.

Withdrawals/Maturity of PPF Accounts

PPF accounts cannot attain closure before maturity i.e. before the end of 15 years. Even if an account becomes inactive, funds accrued therein cannot be withdrawn until the end of the 15 year. On maturity at the end of 15 years, the entire amount held in the account, along with the interest accrued, can be withdrawn freely and the account can be closed.

In case the account holder is in urgent needs of the funds, partial withdrawal of the fund accumulated is allowed on the 7^th year. The amount that can be withdrawn is capped as the lower of

• 50% of the total balance at the end of the fourth year, counting back from the year of withdrawal OR
• 50% of the total balance at the end of the year before the year of withdrawal Withdrawals can be made only once in a financial year.

Extension of the tenure of the PPF Account

Although PPF accounts mature at the end of the 15th financial year counted from the year the account is opened, account holders can make a choice of extending the tenure. According to your choice, tenures can be extended in 5-year blocks with/without making further investments.

• If no fresh investments are made after the PPF account has attained maturity, the account can continue to earn interest on the amount accrued in the account till the end of the 15th year. Also, in this particular case, funds can be withdrawn freely once every financial year.
• If you decide to make fresh investments after maturity, the new deposits will be added to the balance held at the end of the 15th Year and the interest will be calculated on the entire amount. However, in this case, withdrawals are still going to be restricted to a maximum of 60% of the amount held in the account at the very beginning of each 5-year period of extension

Tax Benefits of PPF Account

Tax benefits available on the accounts like that of the Public Provident Fund make these investment options very attractive, especially for the ones using this scheme to build a retirement corpus.

• PPF deposits come under the EEE (Exempt, Exempt, Exempt) tax category.
• Deposits made under this particular scheme can always be claimed as deductions under section 80C.
• The interests earned on these deposits are non taxable.
• The amount withdrawn from the account is exempted from wealth tax.
• The amount deposited in a spouse’s or child’s PPF account also qualifies for tax exemptions.

PPF Calculator

A PPF calculator is an online financial tool offered absolutely free of any cost. It is usually seen to be featured on a bank’s/post office’s website or on third-party financial services provider’s sites. It is useful to those investing under the PPF scheme.

PPF calculator helps in calculating the interest on deposited ppf amount. Any individual can ascertain its requirement and deposit the amount accordingly for its future plans. A PPF calculator defines the amount that will be available in future times for the various purposes like retirement, child education, child marriage etc.

On maturity PPF calculator helps in calculating the amount available in case it is extended for the block of 5 years. Also what will be difference in the maturity value in case additional deposits are made in the account every year.

With option to depositing one time lumpsum or paying a fixed amount every month, it is little tedious to calculate the amount of maturity along with the difference in the interest earned. A precise calculation of principal and interest amount helps in evaluation of investments along with its comparison among other investment avenues like Govt. bonds, NCDs, Fixed deposits, NSC etc.

PPF calculator becomes a necessity when the additional amount is getting deposits at regular or irregular intervals and some amount of loan is already taken. It implies that interest will be re calculated at every new addition of principal amount. Due to loan, a fixed amount will be deducted every month which is towards the interest on the loan taken.

FAQs related to the Public Provident Fund Scheme

1. Which form do we need to open a PPF account? – We need Form A to open a PPF account and it can be generated from a Post Office, bank, or online.
2. Can joint PPF accounts be opened? – No, the opening of joint PPF accounts is not allowed. You can make deposits in your concerned spouse/child/relative’s account, but you cannot hold a joint PPF account.
3. Can I hold two or more accounts under the PPF scheme to increase my returns?- It is one of the basic guidelines of the Public Provident Fund Scheme that a person can open and hold only one account under her/his name.
4. Will I get tax benefits if I am making deposits to my spouse/child’s PPF account?- According to the PPF Scheme, you will be eligible for tax deductions under section 80C, if you are the one making the deposits to your minor child/spouse’s, or anyone else’s PPF account.
5. How many maximum numbers of nominees can I have under my PPF account? – You are allowed to have one or more number of nominees to your PPF account. You can decide and mention shares of the total amount that they’re going to get if something unfortunate happens to you, for your nominees as well.
6. If I go bankrupt, can I withdraw money from my PPF account?- Yes, you can hold and withdraw money from your PPF account even if you go bankrupt, provided you have already completed 6 financial years of holding the account.
7. Can I transfer my account from a Post Office to a bank or from bank to online?- Yes, you can transfer your account from and to anywhere as long it is between the bank, post office or online transaction. The process of transferring is hassle free and completely free of cost.
8. What is the maximum amount that can be withdrawn before maturity? – Once you have reached the seventh year of holding your PPF account, you can make partial withdrawals which can be equal to the 50% of the total amount.
9. Can I reopen an inactive account and continue with it? – Yes. For that, at first you have to pay the holding branch a penalty of Rs.50 for every year the account was inactive. In addition to that you will also have to deposit a minimum amount of Rs.500 for each and every year the account was inactive as well as Rs.500 for the year you are reactivating the account.
10. How do I get the interest of the inactive years after I reopen my PPF account? –  Interest will not be calculated for each and every year or number of years the account is inactive. Once the account is reopened and revived, interest will be calculated on the balance held at the time of reopening of the PPF account.
11. If I make deposits into my wife and child’s account, will my tax deduction allowance be Rs.1.5 lakhs each? – Under Section 80C, an individual is allowed to have tax deductions of Rs.1.5 lakhs per year. So, you can possibly claim for tax deductions through as many accounts as you make deposits into, but you will be eligible for the tax deductions up to only Rs. 1.5 lakhs per year.
12. Will I be allowed to invest more than Rs. 1.5 lakhs in a year? – Yes, you are free to invest more than Rs. 1.5 lakhs within the period of a year. But all the calculations, including that of the tax deductions and the interest on the returns are calculated on your maximum limit of Rs. 1.5 lakhs.
13. What if I do not wish to withdraw the entire amount at the time of maturity after 15 years? – It is absolutely fine if you do not wish to withdraw the entire sum of money at the time of maturity. You can extend your account for 5 more years from the time of maturity, and continue with your investment. But you cannot extend it beyond the tenure of 5 years.
14. My father wants to open an account in the name of my daughter, i.e. his granddaughter; is it allowed under some special clause if the grandparent is not too old and crippled? – There is no such hidden or special clause like that. Grandparents are not allowed to open and hold accounts on behalf of their grandchildren. If necessary, the grandparent can give the money to parent of the child to be safeguarded and invested.
15. I am leaving the country for work purpose and will attain NRI status soon. Does this mean that I cannot continue holding my PPF account? – If you are a resident Indian at the time of opening the PPF account and you decide to move out of the country before your PPF account matures, then you are allowed to keep maintaining your account. But, on the other hand, you are not allowed to pull extensions to your account once it has matured.
16. Do the interests keep flowing during the period of the extension of the PPF account? – Yes, the compounded interests are credited during the extension period as well.
17. If I make fresh deposits at the end of 15 years and while I am extending my account, do I get interests for the additional deposits as well? – Yes, you do get interests on the additional fresh investments that you make. The amount will be added to the balance at the end of the 15th year and the total amount will be considered as the principal amount for interest calculations.
18. Can an individual open an account on behalf of a HUF? – No. First of all, since 13 May, 2005 HUFs are not allowed to open any new PPF accounts. The accounts opened before that date was allowed to continue until maturity without any extensions. And now, any individual cannot hold a PPF account in the name of a HUF.
19. When and how can I apply for a loan against my PPF account? – The loan facility can be availed starting from the 3^rd financial year to the 5^th financial year. You can apply through the Form B or seek guidance at the post office or bank for getting the details on how to avail the loan facility against your PPF account.
20. What is the role of compounding in PPF? – The interests that you get on your investments are calculated by the process of compounding. Compounding makes the PPF rate of interests much more attractive. It is better to invest as early as possible, because the earlier an individual invests, the more she/he stands a greater chance at decent and reasonable profit at the time of maturity. A stark rise in interest rates, coupled with the raising of the deposit ceiling over all these years, has enhanced returns to depositors.
21. Can I repeat the 5 year extensions over and over again, or does it end at a onetime extension of 5 years? – You can repeat the 5 year extensions for as many times as you want. For instance, if a particular account matures on 31^st March, 2020, it can be extended till 31^st March, 2025. The next extension will start on 1^st April, 2025 till 31^st March, 2030; and so on.
22. Can I make withdrawals and take loans at the same time? – No. Loans and withdrawals are independent of each other and the facility of loans can be availed between the 3^rd financial year and the 6^th financial year. On the other hand, the facility of withdrawals is allowed from the 7^th financial year onwards. So there is no way of these two getting clubbed or clashed.
23. If I deposit the money into my wife’s PPF account, does it make the both of us eligible for tax deduction or just one of us? – If you are depositing your money into your wife’s account, then it is only you who’s going to be eligible for the tax deduction and exemption. Since a part of your income is going here and nothing from your own wife’s side, so your wife doesn’t stand a chance for any kind of tax deductions or exemptions here.
24. Can I redeposit the withdrawn money from my PPF account to meet the annual cap of minimum investment? – Yes, you can withdraw your money and then redeposit it to meet the minimum of Rs. 500 investment every year.
25. Why is it suggested to deposit the money in the first week of the month? – For any particular month of the year, only the deposits made before the 5^th of that month is taken into account while calculating the interests. The interest is calculated on the lower of the balance held as on the 5th of a particular month till the end of that month
26. After the revival of my PPF account, shouldn’t I be getting interest for inactive years? – No. Interests won’t be calculated for the year(s) the account is inactive. Once the revival of the account is done, the interest will be calculated on the balance held at the time of revival.
27. How many times can I make withdrawals in the extension period? – In the special case of extension, you are allowed the privilege of making withdrawals once every from your PPF account.
28. My grandfather has died. He didn’t have any nominee for his account. I am his natural heir, so can I claim the withdrawal of his PPF at the time of maturity? – Yes. In case there isn’t any nominee left for the account, the heir gets the money.
29. I am my husband’s nominee. How do I make the claim for the money? – You can go to the Post Office or bank that holds your account and ask for the Form G and apply for the claim through it.
30. Is it unsafe to hold PPF accounts in private sector banks? – NO. It is not unsafe to hold PPF accounts in private sector banks if the bank is authorized for it.

Falling Interest rates of winning PPF scheme. HOW?

The interest rates of PPF have only gone down in all these years. Yet it is still the most popular savings cum tax saving scheme in the country of India. This is because if you think of your long term profit, PPF still gives you more than other schemes.

If you invest Rs.1.5 lakh in both PPF and bank Fixed Deposits, you will see better fare from the former’s side because at the end of 15 years, PPF gives you its Exempt, Exempt, Exempt (EEE) tax status at each and every stage of investment.

This EEE tax regime is broken down below for your better understanding:

1^st E – investments of up to Rs. 1.5 lakh per year is eligible for deduction under the PPF scheme.

2^nd E – the interest that is earned is exempted from tax.

3^rd E – the amount received at maturity of the PPF account is also exempted from tax.

But it is just not about the returns; PPF is a household favorite when it comes to making investments among the masses.

This is because

• It is the safest yet most dynamic long term government backed investment scheme.
• This scheme allows you to take loans against it and premature withdrawals when necessary.
• Your investment in to the PPF account can’t be attached for debt clearance or payment to creditors in case of bankruptcy.
• After maturity, you can withdraw the entire amount at once.
• Or else, you can extend the account’s lifeline by another five years.
• If you don’t withdraw or extend you matured account further, the account automatically gets extended and gets you attractive interests.

Why is PPF better than FD?

The Public Provident Fund and bank Fixed Deposits are often known to be the safer options of investments with reasonably attractive interest rates. But when it comes to long term investment plans, the Public Provident Fund can win over the Fixed Deposit any day. Yet, let us have a detailed study so that you have reasons enough and good to make your choice.

Amount of Investment – In PPF, you can invest up to Rs. 1.5 lakhs per year. On the other hand, there is no upper limit when it comes to the annual investment amount in bank Fixed Deposits.

Tax Deduction – Tax deductions of up to Rs. 1.5 lakhs are allowed in the case of PPF U.S 80C. Some bank FD policies also allow tax deductions under the same section; which means if you invest more than Rs. 1.5 lakhs into the fixed deposits, you cannot avail any tax deductions under it.

Interest rates – The interest rate of the PPF is always decided and announced by the Central Government, so you can expect a no nonsense and safe side here. The interests rate of the bank Fixed Deposits on the other hand are getting competitive and attractive as they are decided by the concerned banks themselves. There is greater instability here, as it might happen that a bank offering the highest rates of interest crash down all of a sudden.

Premature Withdrawals – In the case of Public Provident Fund, premature withdrawals are allowed from the 7^th year onwards whereas most banks allow premature withdrawals in your long/short term Fixed Deposits any time you want. But they charge a fine for any premature withdrawal that you make, which the PPF doesn’t.

Loans – Under the PPF scheme, you can avail the facility of loan against your PPF account from the 3^rd year till the 5^th year. Most banks on the other hand offer an overdraft facility regarding loans.

Safety net – Since you can withdraw money and use you FD money for loans any time you want, you tend to keep it as an option of expenditure in need. So somehow or the other, your safety net for life after retirement never gets strong with FDs. While PPF, with all the restriction is a strict savings cum tax saving account.

Long term Investment – Bank Fixed Deposits are not as stable and safe as Public Provident Funds. Since they offer attractive interest rates along with their instability, they are good for short term investments. A lot of people think FDs are long term investment tools’ but it is profitable when it is seen as a short term investment tool. For long term safe investment, PPF is a better option.

Why is PPF better than ELSS?

The Public Provident Fund scheme and Equity Linked Savings Scheme are both Tax Saving Schemes. But when it comes to safe investment options, the PPF scheme is better than the ELSS. Let us discuss this in detail now.

Amount of Investment – You can invest any amount you wish to in the ELSS. On the other hand, PPF has an upper limit of Rs. 1.5 lakhs as the amount that you can invest in it.

Tax Benefits – In both ELSS and PPF, you can avail tax exemptions up to Rs. 1.5 lakhs in one year. So when you are investing in ELSS, you are not only putting your money at risk, but also you don’t get tax benefits on the money you invest above the Rs. 1.5 lakhs limit.

Risky Returns – The returns in ELSS are higher, but that is because the investment is also risky and for a short period of time. The PPF on the other hand has minimal risk factor and the returns are decent as well. The PPF has a fixed rate of interest decided and backed by the Central Government, so it is not as high as the ELSS but is on the other hand, completely low on risk factor.
Lock in Period – The lock in period for PPF is of 15 years. The lock in period of ELSS is of 3 years, thus giving out a clear sign that it is not a long term or trustworthy investment option.

Withdrawals – You are allowed to make withdrawals from your PPF account from the 7th year onwards. The ELSS doesn’t allow you to make withdrawals at all within its lock in period of 3 years.

Recent developments in the scheme of PPF

The rates of interest for the PPF were revised once every year. But from 1^st April 2016, the rates of interests for Government backed schemes including the PPF is considered for revision every quarter, based on the last quarter’s yield on benchmark government securities or bonds of corresponding maturities with a small mark up of approximately 0.25%.

This basically means that when the yields go up, the interest rates of PPF should go up after that. And if the yields go down, the rates of interest of the PPF should go down a few months after that too.

Here is a quotation from an article which states why the Government decided to make a switch from the annual to quarterly revision of rate of interests.

“according to report in 2011by Shyamala Gopinath Committee (which was set up to review National Small Savings Fund, or NSSF), such a fixed rate regime caused a lot of volatility in collections.

When market rates declined, small savings collections went up as their rates remained unchanged. The opposite happened when market rates went up. This leads to a situation where when market rates are low, states are loaded with high cost NSSF loans, and when market rates are high, NSSF loans as a source of financing fixed deposits dries up completely. It is therefore, very essential to align these rates with market rates.

In December 2011, acting on the recommendations of the report, the government made returns on small savings schemes market-linked. Rates on these products were benchmarked to government securities (G-secs) of similar maturity periods with a positive spread of 25 basis points.”

Interest Rate Risk

Because the interest rates are now decided on a quarterly basis and not on a yearly basis like it was before, there has been a slight increase in the interest rate risk as far as the PPF is concerned. So in a falling rate of interest scenario and for someone who has a higher PPF balance, it has the potential to bring in some loss and be hurtful.

But if we compare the rate of interest with the rate of inflation, which is around 5-6%, it seems satisfactory enough. But then again, this inflation rate is announced by the RBI; and the inflation in real market is a bit different than that.

Insights

If spent recklessly, even a lifetime of hard earned money can also not be there for you in the times when you’re actually in need of them. In today’s dynamic market and with plenty of financial investment tools in the market, it is necessary for you make the correct choices. Earlier, PPF was a go to investment option for generations before us. But today, the things that you have to keep in mind are as follows:

• Set your financial goals and invest according to that.
• If you want to take the risk and are focused on higher returns and higher rate of interests, make sure your investment serves your purpose and is at the same time short term as well.
• When you’re making long term investments, you have to make sure that the scheme you are investing in is safe and guarantees some minimum amount of returns that you find reasonable against your investment.
• For instance, the benefits of FD’s, PPF, SIP or ELSS are all unique. It is you who has to make wise decisions based on your present and future financial goals. You have to set your priorities right. It is you who knows that after 15 years, do you want more and more wealth or do you want to manage them or save your taxes.

One underrated but good thing about the Public Provident Fund Scheme is that it is closed and has its constraints. Saving isn’t easy. A lot of us have itchy hands, and it difficult to save for long term goals for us. PPF, with all its fixed guidelines laid out for years now, will guide us towards disciplined saving. And not to forget, it will be our safety net, that will be there for us even when we go bankrupt.