10 Feb 2014

Should I Invest In A Public Provident Fund ?

YES ! The answer is short, sweet and simple. Public Provident Fund also known as a PPF account can be opened by any resident in India. It is a safe and sound investment which does not get much media attention since it is boring (read secure) and does not have the adventure and excitement that trading in shares or equity has.

What is a PPF ?
- It is an account that can be opened by any resident in India.
- An account can be opened in the name of a minor by their legal guardian.
- Money is locked away for fifteen years and you can extend it in blocks of five years.
- Most people look at it as a safe investment for retirement.
- The current interest rate (as of April 2013) is 8.7%.
- The contributions are eligible for income tax deduction under Section 80 C.
- Minimum contribution is Rs.500 per annum and maximum is Rs.1,00,000 per financial year.
- Interest is tax free when you withdraw at the end of the tenure.

Why should you invest in a PPF account ?
1. All of us are growing old
Whether we like to acknowledge it or not, we have to start saving for retirement. This is an awesome instrument to stash away cash for retired life.

2. Did I mention interest is tax free !
No other banking instrument has tax free interest. Think about it - fixed deposits, recurring deposits and savings accounts interest rates are all taxed depending on the tax slab we fall under. 

Where can you open a PPF account ?
Currently eight banks in India offer a PPF account and most require that you have a savings account with the branch. A PPF account can be opened at the following places:
1. State Bank of India and subsidiaries
2. ICICI bank
3. IDBI bank
4. Vijaya bank
5. Indian Overseas Bank
6. Bank of Baroda
7. Union Bank of India
8. Central Bank of India.
9. The post office.

Most Common Excuse - "But I Already Have an Employer Provident Fund"
When people talk of a PF (Provident Fund), they are talking about contributions made to an employer provident fund where the employer will match the contribution made by the employee, up to 12% of annual income. The EPF contribution is also eligible for tax deduction under Section 80 C. Since the maximum deduction under 80 C is Rs.1,00,000 people do not contribute to a PPF account as they have already met the Rs.1,00,000 slab. My sincere suggestion is that one must contribute the maximum amount possible, to a PPF regardless of the income tax deduction as long as the PPF contribution does not exceed Rs.1,00,000 every financial year. The reason for this is simple :
- your money will earn interest @8.7% which is tax free and your principal is secure. Contributions above Rs.1,00,000 do not earn any interest.

Things To Remember About PPF :
1. Remember to make the minimum contribution of Rs. 500 per annum, else the account will be deactivated.
2. The interest is calculated on the lowest balance from the 5th of every month to the end of the month. The simple rule is to contribute as much as you can in the beginning of the fiscal year which is in April every year. The earlier you contribute the more interest your money earns.
3. The interest rate is compounded annually and it fluctuates every year.
4. A loan can be taken from the PPF account beginning the third financial year till the fifth financial year.
5. Pre mature withdrawals can be made from the end of the sixth financial year
6. Please do not contribute more than Rs.1,00,000 per annum. Contribution over Rs.1,00,000 do not earn any interest. 

Things happen in life and you might have to make a premature withdrawal but try and avoid it.

If a PPF is so great why don't we hear more about it ?
It is an account that has been around for ages. The financial advisors do not get much of a commission to open one.It is a wonderful instrument for the risk averse and great for the risk takers so as to balance out their portfolio. I think every individual whether salaried or an entrepreneur should have a PPF account.

Start saving for retirement regardless of your age group. The earlier the better. Small savings now add up over time and create significant wealth.


  1. Very informative and encouraging article. We have been contributing to PPF to the maximum extent irrespective of tax advantage and not regretted it.
    some additional points-1. one can withdraw 50% of the balance as on three years prior to withdrawal with no strings attached. This has helped us meet major expenses like marriages.
    2. On maturity one can renew for a period of 5 years at a time and also one can withdraw 60% of the amount in your account. You can use the money for some serious investment like real estate.

  2. Thanks for the comment and sharing valuable information. The information helps me and all the readers.