WHY YOU INVEST IN THE PUBLIC PROVIDENT FUND IN THE FALLING INTEREST ERA?

In the evolving world, the rapid change in culture and technology is too difficult for an investor to get decent returns by investing in a financial instrument. Although there are varieties of debt instruments available in the country, Public Provident Fund (PPF) is very popular among them for long-term investment.

Public Provident Fund (PPF) is a reliable investment option for individuals to build a corpus in the long-term, as it beats inflation and generates a risk fee and tax-free returns. It is ideal for investors who want a stable income in the long-term and have a low-risk appetite. PPF is a long-term tax-efficient investment scheme that is popular for the small investor. It is an excellent and secure investment for retirement planning and meeting your children’s higher education.

The investor will visualize the power of compounding by investing in PPF at the right time. For a numerical example, you determined to create a corpus for your retirement for 25 years without any risk, you can deposit ₹ 150,000/- (One lacs fifty thousand) at the beginning of each year in Public provident fund (PPF), and after 25 years you can get the amount of ₹ 100 Lakh (One hundred lakhs) with an interest rate assuming of 6.95% per annum(current rate 7.1%). During the 25 years, you are investing total amounting of ₹ 37,50,000/-and earn tax free interest income of ₹ 62,50,000/-. This arrangement qualifies deduction under Section 80C of the Income Tax Act maximum up to ₹ 150,000.00 per annum under the old tax Regime with effect from FY 2020-2021.

There are so many features in the PPF, which cannot be compared with other debt instruments. As it is covered under small savings schemes by India’s government, the interest rate risk affects the PPF corpus in the falling interest era and vice versa. But It would not affect so much in the long run in comparison with other secured debt funds.

The interest of the PPF investment is calculated quarterly with effect from 2016-17 and is credited to the subscriber’s account yearly. The government reviewed and announced rates of small saving schemes quarterly based on the recommendation by the Shyamala Gopinath Committee. Hence, all the small savings schemes such as National Savings Certificate(NSC), Post office time deposit, Public Provident Fund(PPF), Senior Citizen Savings Scheme(SCSC), Kishan Vikash Patra(KVP), Sukanya Samridhi Yojana(SSY) account interest rates change as per prevailing market rates, which is a cause of concerned of the investor.

The graphical view of the PPF interest with effect from 1986 to Sep 2020 as under:

The PPF interest rate has steadily dropped over the years and can be expected to fall further due to the reduction of interest rate in the coming years. The subscribers earned a stable interest of 12 percent per annum from 1986 to 2000, and now it is between 7.75 to 7.1 percent. It might further down to a 200-basis point if the government accelerated the economic growth trajectory.

Public Provident Fund (PPF) subscribers will continue to earn 7.10 percent per annum interest for the quarter of July- September 2020 as per the government’s announcement. The interest earned in each quarter will be compounded annually.

Public Provident Fund (PPF) is a 15-year investment scheme under the Exempt Exempt Exempt scheme (EEE) which an investor can invest a minimum amount of ₹  500.00 and multiple of Rs100.00 therein up to ₹ 150000.00 maximum per annum (over a maximum of 12 installments per year) and avail the income tax exemption at the time of deposit, accrual of interest and withdrawal.

A PPF account has a lock-in period of a maximum of 15 years. At the end of 15 years, one can extend one’s subscription, in blocks of 5 years or else close the account.

The balance of a PPF account is fully exempt from wealth tax. It is also not subject to attachment under any order or decree of any court under the Government Savings Banks Act, 1873. Interest on PPF is calculated monthly on balance between the close of 5^th  and the last day of every month.

One can deposit in PPF account in between 1^st to 5^th of every month and get a full month interest in his PPF account. The amount you deposited on the 6^th of a month not earn any interest in that month. Interest is tax-free, one must mention in the income tax return under exempted income while filling the return.

You can partially withdraw your PPF account in case of an emergency for specific reasons. However, it is only when possible after the completion of 5 years of your account. Like partial withdrawal, premature closure is permitted after completion of 5 financial years from the date of opening the account only on specific grounds such as life-threatening ailments affecting the subscriber, Spouse, dependent children or parents, or higher education of account holder or the minor account holder. However, the subscriber will get 1% less from the applicable interest rate on premature closure of the PPF account.

Any resident Indian can open a PPF account either through post offices or nationalized designated banks. There is no fixed age limit for the opening of a PPF Account.

You may make a list of your current wants & desired goals and commit to achieving it. What you have committed in life, you have to plan accordingly and invest them in regularly.

A small investment in a public provident fund through systematic investment plans (deposit every month for ₹12,500.00) can achieve the desired goal, such as higher education expenses for children, the wedding of daughter or son, and your post-retirement expenses. It is an excellent and secure investment in the retirement planning of an individual. In a retirement plan, one must invest in a 15-year PPF account, considering the current expenditure, plan for the future would be cost based on present lifestyle & inflation factor.

If you can invest, say ₹12,500.00 at the beginning of the month, like with a SIP, on your 40th birthday, in 20 years, your total investment will be ₹ 30 lakhs. If that investment grew by an average of 7.1% (current rate) a year, it would be worth ₹ 64.56 lakhs when you reach 60, provided that you have to extend your subscription, another 5 years. The above amount is generated around ₹ 34,970 per month (6.50% interest in bank FDR), of your post-retirement living expenses.  By investing in other financial instruments, you can secure your post-retirement expenditures in case the requirement is more than ₹ 34,970 per month.

PPF helps you building your portfolio in the long-run. Generally, the younger generation does not like to invest in debt funds for 10 to 15 years. However, PPF could work well for them as a debt investment because of its secured (backed by the government), tax-efficient, and assured returns.

Eminent Author R K Mohapatra, quoted on Outlook Money “Despite Falling Interest Rates, PPF Still A Sound Investment Option.”

“In the falling interest rate era, investment in PPF makes senses for people who are in higher income tax brackets because of the advantages of exempt-exempt-exempt (EEE) scheme, which means they get tax deduction under Section 80C when they invest money(opting old tax Regime), and the accrual of interest, as well as the withdrawal, is entirely tax-free.”

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