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Public Provident Fund (PPF) is a hot favourite amongst tax saving investments with an effective return upto 18.22%!

PPF enjoys the pride position of being a wonderfully attractive investment scheme offering total safety, a high degree of flexibility, reasonable tax free return and useful tax saving through the shelter of income-tax rebate. Let us take a bird’s eye view of these special attractive features of PPF:

 Total Safety: Enjoying highest security in terms of investment, PPF is perhaps the only asset which is free from any civil claim or attachment, even by a Court of Law. No wonder, there are people who have practically lost everything in the debt claims against them, except their investment in PPF!

 High Flexibility: Although the maturity period of investment in PPF is 15 years from the opening of the Account, the minimum annual investment required is only Rs.500 per annum, giving the investor freedom to invest as per his choice and available resources.  The maximum limit of investment is Rs.1,00,000 per annum.  The other attractive feature of PPF is that even after 15 years, the account can be renewed for a fresh term every 5 years.  This facility of extending the 5 year block period from 15 to 20 to 25 to 30 years and so on can be availed continuously as per the choice of the investor.  The privilege of one annual withdrawal from PPF after the initial 6 years period and even during the extended block period after 15 years as available to the investor can come extremely handy in times of need.

Tax Free Return: Interest rates on PPF are annually reviewed and the rate so announced is applicable for that financial year. The current tax free return of 8.70% per annum on PPF for FY 2013-14 (marginally reduced from 8.8% in FY 2012-13) is amongst the best tax free returns.  An added advantage where contributions are made by an investor to his minor child’s account, would be that the interest income credited in child’s PPF Account being tax free, will not attract any clubbing provisions of section 64 of the Income-tax Act.

Tax Savings through Deduction: Annual Investment of Rs.1,00,000 in PPF is eligible for Income-tax Deduction under the provisions of Section 80C of the I.T. Act.  Accordingly, a taxpayer can effect tax savings of Rs.10,300 to Rs.30,900 depending on his marginal tax bracket of 10.3% to 30.9%. Where contributions are made by an individual to the PPF account of his spouse or child (minor or major), even these are eligible for deduction under Section 80C. An HUF can also avail the benefit of deduction under Section 80C by contributing to the PPF account standing in the name of any member of the family.

           PPF CAN WEAVE RETURN UPTO 18.22%

            Just 8.70% interest on PPF, most people think, when calculating return on investment.  However, few realize that keeping in view the twin benefits of total tax exemption granted to PPF interest under Section 10(11) of the Income-tax Act and availability of full deduction under Section 80C of Rs.1,00,000 invested in the PPF Account, the effective earning on investment after considering the tax savings on the above counts can work out to as high as 12.59% in cases of taxpayers in the top tax bracket of 30.9%. Let us see how the PPF magic works, as illustrated by the Case Study hereunder:

 Case Study:  Mr. X, a taxpayer earning taxable income of more than Rs. 10,00,000 attracts tax in the maximum bracket of 30.9%.  He earns interest of Rs.8,700 at 8.70% on his PPF investment of Rs.1,00,000.  However, considering the fact that he does not have to pay any income-tax on the same, the equivalent pre-tax return would amount to 12.59% or Rs.12,590. This is on the basis that if Mr. X had earned Rs.12,590 at 12.59% on Rs.1,00,000, after paying tax at 30.9%, he would have retained Rs.8,700.

 However, the PPF thrill doesn’t end here.  The interest of Rs.8,700 earned by Mr. X should be evaluated on his effective investment in PPF, which is not Rs.1,00,000, but after considering the tax saving of Rs.21,630 on account of deduction under Section 80C (30.9% of Rs.1,00,000), the same actually works out to only Rs.69,100 (1,00,000 – 30,900).

   Now, let’s compute what Rs.12,590 (pre tax return on PPF) translates in terms of return on the effective investment of Rs.69,100 as explained hereinabove.  Wow!  That actually works out to 18.22% on your calculator!  Amazing, but true!  The comparative returns on the above basis for taxpayers in the tax brackets of 10.3% and 20.6% would accordingly work out to 14.04% and 15.86% respectively. 

                   EARLY BIRD CATCHES THE WORM!

            Since it is no longer necessary that your investment in PPF should come out of your taxable income, you should plan your PPF investment in the fiscal year, as early as you can and start reaping 8.70% tax free return, rather than leaving funds idle in your savings account to earn just around 4% and that too taxable! It is even more important to keep in mind the provisions of Clause 8 of the PPF Scheme, 1968, which provides that “interest shall be allowed for each calendar month on the lowest balance at the credit of the PPF account between the close of the fifth day and the end of the month.”

             So if there is the balance in your account, just go ahead and get through your PPF investment for the current fiscal before 5th April.


  1. Bankim Shah says:

    Hello Sir, Greetings of the day.

    I am Bankim Pravin Shah residing at Vadodara, Gujarat.
    I have a query related to our PPF account not getting extended as maturity date got over on 31.03.2016 & 31.03.2019 respectively for our 3 Accounts. Since 2016 we were regularly depositing amount in our respective PPF accounts but today i.e. Dt. 3.4.2020 when we attempted to deposit amount FY 20-21, through NEFT to our respective PPF Accounts, it did not accept and amount was returned to our original bank account.

    Today, Dt. 4.4.2020, we consulted local SBI Branch in person. They have asked us to close these accounts as the same cannot be extended further as system does not allow them and have asked us to withdraw total amount from all 3 accounts, with an option to open new PPF Account.

    We need your guidance on following as we would not like to withdraw this amount as with great efforts, we have been saving our earnings and depositing it in PPF account to earn tax free amount and this information from bank has put us in difficult mode.

    1. if the maturity date can be renewed/Extended further or not and what are the guidelines and process to do so.
    2. Is there a way to extend the validity of same account even after maturity of account is over and not renewed within stipulated time
    3. Can we keep the amount in existing PPF account and can we get interest on it even if account is not extended.
    4. Can we keep existing accounts as it is instead of closing these accounts and open new PPF accounts so that amount invested already is not disturbed and we continue to deposit in new accounts. What is the maximum age limit for opening new PPF account.
    5. Which are the other suitable investment options to earn tax free returns. My parents (Father & Mother) are 75 years of age and age of self is 46 Years.

    Please also let us know fees to be rendered along with your bank account details, for the useful guidelines that you shall be sharing with us.

    I shall be grateful to have your earliest reply.

    Thanking you in anticipation.

    Bankim Pravin Shah

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