6 reasons why individuals like PPF as an investment

By Larissa Fernand |  06-02-20 | 

In You may not need a PPF account, I explored the various reasons an individual may choose not to open a Public Provident Fund account. Over here, I look at the flip side; why many do open it.

1. The assured return.

The investor is assured a fixed return every year, though the exact figure varies. Earlier, the returns would be set every year. Now, to keep it more market aligned, it is reset every quarter according to the yield on government securities. At one time, the instrument earned 12% per annum. At the turn of the century it dropped to 11% and went further down to 8%. It moved up for a while touching 8.8% before beginning a downward journey. It went down to 7.6% and is now 7.9%.

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2. The tax break.

Investments in PPF are entitled to a tax exemption up to Rs 1,50,000 under Section 80C. What’s more, even the interest earned is tax free. The interest is added to the principal investment and compounded, and the accumulated amount is also exempt from tax on maturity. This makes it an EEE investment; which is an acronym for Exempt, Exempt, Exempt.

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3. The safety.

Investors are assured of the timely payment of interest and the return of the accumulated investment on maturity.

Any sovereign backed investment (which means it is issued by the national government of a country) stands for the highest safety. Since the funds in PPF are backed by the central government (not state government), the investment does not get any safer than this because the government will not default in its payment.

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4. The immunity.

As per Section 9 of Public Provident Fund Act, 1968, the amount in a PPF account cannot be attached under any decree or order of the court to recover any debt or liability incurred by the account holder.

Hence, in case of payment of business liabilities or to pay alimony to spouse in case of marital dispute or to settle a divorce case etc, an individual’s immovable properties and investments may be attached in case of shortage of money.

But the amount in a PPF account cannot be attached under any court order with respect to any debt or liability of the account holder.

However, there has been adequate debate as to whether the Income Tax Authority is free to attach and recover the dues of an account holder. A clarification by the Central Board of Direct Taxes stated that the above Section 9 applies only to attachment under a decree or order of a Court of Law and not to attachment by the Income Tax Authorities and Estate Duty Authorities.

Which means that the amount standing to the credit of subscriber in his/her PPF Account shall be liable to attachment under any order of income tax authorities in respect of debt or liability incurred by the subscriber.

While it was given to understand that the Income Tax authorities can attach the account for recovering tax dues, the court has ruled otherwise. (Source: Taxguru.com, Tax blog, Taxvani.com).

So as long as the amount remains invested in a PPF account, it would be immune from attachment for recovery of the tax dues. The situation may change as and when such amount is withdrawn and paid to the subscriber.

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5. The flexibility in minimum amount.

Each financial year, a minimum of Rs 500 is needed to keep the PPF account active. On the other end of the pendulum, the annual investment cannot exceed Rs 1.50 lakh. This is the upper limit not only for Section 80C but even PPF individually.

Moreover, the PPF deposit need not be invested in one go. It can be done in a maximum of 12 instalments in a financial year.

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6. The forced savings.

Many find the PPF tenure to be agonizingly long, a 15-year investment with a 16-year lock-in. The first year is not taken into consideration when looking at the maturity of the account. The end of the financial year in which the deposit was made is what matters.

So if you opened the account on July 15, 2000, the 15-year tenure will commence from end of FY2000-01 (March 31, 2001). That means, it would have matured on March 31, 2016.

This is an excellent long-term savings tool where the interest is compounded and tax free in the investor’s hands.

The return is assured and compounded annually. So let’s say you invest Rs 1,50,000 earning 7.6% per annum. At the end of the first year, you will earn Rs 11,400 and the total balance will amount to Rs 1,61,400 (1,50,000 + 11,400). The next year, when you invest Rs 1,50,000 again, it will be added to Rs 1,61,400 and interest will be paid on the total amount (Rs 3,11,400), taking it to Rs 3,35,066. Compounding has this benefit. Imagine this going on for 15 years. Let’s say you invest Rs 1,50,000 for 15 years earning 7.6% per annum. Your final balance will be over Rs 42 lakh.

Do note, return could be lower if interest rates fall. Also, this calculation is based on the assumption of a Rs 1.5 lakh investment being made in lumpsum between April 1 and April 5.

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