The Public Provident Fund (PPF) is one of the most preferred tax saving investment options for the salaried class. The importance of PPF as an excellent small-savings tax saving instrument can never be overemphasized. This is on account of the following two reasons:-

1. Tax-free yearly interest plus no taxability on withdrawal

2. Annual compounding

The PPF, besides the Employee Provident Fund (EPF), remains the bulwark of building a sizeable retirement corpus for your sunset / golden years. Since the PPF has a long tenure of 15 years, the impact of compounding is huge, especially in the later years. Further, because the principal and interest earned is backed by a sovereign guarantee, it makes the PPF a safe investment. It is therefore not surprising that an overwhelming majority of people include PPF in their investment strategy to build a decent retirement corpus.

Following are the things that you must know about PPF:

1. Opening a PPF account– You can open a PPF account in a post office or in select bank branches. Opening a PPF account is possible if regular KYC documents are submitted with a minimum investment of Rs. 500 annually.

2. Interest Rate – The interest rate on PPF, which previously used to change every financial year in accordance with the average bond yields of previous years, is now determined on a quarterly basis by the government, with the 10 year government bond yield continuing to remain as the reference point. Currently, the rate of interest has been fixed at 8% for the Jan-March 2019 quarter.

3. Calculation of Interest – The interest is compounded annually for the balance amount in your PPF account. However, the interest calculation is done each and every month.

4. Tax Benefit – Interest money earned from PPF is tax free. Under section 80C of the Income Tax Act, 1961, whatever contribution you make in PPF is eligible for tax deduction. The tax benefit is capped at ₹1.5 lacs per financial year. Contributions to PPF accounts of the spouse and children are also eligible for tax deductions.

PPF falls under the EEE (Exempt, Exempt, Exempt) tax basket. Contribution to The interest earned is exempt from income tax and maturity proceeds are also exempt from tax.

5. Investment limits – The minimum amount you need to invest every year is Rs. 500 and the maximum amount of investment allowed every year is Rs. 1.5 Lakh.

6. Maturity –The PPF account will mature at the end of the 15th year. This can be extended for one or more blocks of 5 years thereafter.

7. Premature closure of PPF account- The Public Provident Fund (Amendment) Scheme, 2016 made changes in Paragraph 9, for sub-rule 3(C) of Public Provident Fund Scheme, 1968 to facilitate the premature closure of PPF Account. Premature closure of PPF account is permitted after completion of 5 years for medical treatment of family members and for higher education of the PPF account holder. However, premature closure comes with an interest rate penalty of 1%.

8. NRI’s Opening a PPF Account – NRI’s cannot open a PPF account. If you open a PPF account as a resident and subsequently you become an NRI, you will be allowed to continue and contribute till its maturity on a non-repatriable basis.

9. Death of Account Holder – In the event of the death of the PPF account holder, the nominee or legal heir of the deceased person will be paid the balance amount in the PPF account even before the completion of 15 years.

10. Transfer of account- The account can be transferred to other branches / other banks or Post Offices and vice versa upon request by the subscriber. The service is free of charge.

• Step 1 – Approach the bank or post office branch where the PPF account is held and ask for the relevant form for making the transfer. The bank or post office will provide you with the form which is required to be filled.
• Step 2 – The existing bank will then forward a certified copy of the account, the account opening application, nomination form, and specimen signature. It will also forward the cheque/DD for the outstanding amount in the PPF account to the new bank at the branch specified by the customer.
• Step 3 – Once your bank receives these documents, the bank will inform you and ask you to submit a new PPF account opening form along with the old PPF passbook. You can also provide nominations for this new account. You will also be required to submit the KYC documents.
• Step 4 – If you hold an internet banking facility with your bank, after a few weeks, check that the transferred PPF account now shows up under the PPF account tab / link in your login. If that is not the case, inquire at the local bank branch.

11. Sovereign guarantee & no court attachment – The PPF is the only investment instrument in India which enjoys a complete sovereign (or government-backed) guarantee; further, the balance in the PPF account cannot be attached even through any court order.

To conclude, we can infer that PPF is particularly suitable to those investors who do not want volatility in returns akin to equity. However, for long-term goals and especially when the inflation-adjusted target amount is high, it is advisable to take some equity exposure also, preferably through equity mutual funds like tax-saving ELSS.

In addition to it, comparing them, however, is not warranted as both PPF and ELSS belong to different asset classes, with the former currently generating around 8.0 per cent returns as compared to the latter generating historical returns of around 12 per cent. The latter will anyways have a higher maturity corpus (with relatively more volatility) than the former (with relatively less volatility) Diversifying one's savings in PPF and equities would serve the purpose rather than relying entirely on just one avenue.

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