Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a secure, government-backed savings scheme introduced in India in 1968 to encourage long-term investments for retirement. Available to resident Indians, PPF accounts can be opened at designated post offices and authorized banks, with a 15-year tenure that can be extended in blocks of 5 years. Investors can contribute between ₹500 and ₹1.5 lakh annually, either in lump sum or up to 12 installments per year. The government determines the interest rate, which is revised quarterly and compounded annually, ensuring steady growth.

PPF offers significant tax benefits, with contributions eligible for deduction under Section 80C of the Income Tax Act, and both interest earned and maturity proceeds being tax-free. Despite the long lock-in period, the scheme allows partial withdrawals from the seventh year and loans against the balance from the third to sixth year, providing some liquidity. With provisions for premature closure under specific conditions and a structure that fosters disciplined savings, PPF remains an attractive, risk-free investment option for those seeking to build a substantial corpus for their future financial security.

Key Features of Public Provident Fund (PPF)

Eligibility:

Resident Indian individuals can open a PPF account, including minors under a parent’s guardianship. NRIs cannot open new PPF accounts but can maintain existing ones until maturity.

Account Opening:

PPF accounts can be opened at designated post offices and authorized banks across India, with each individual allowed only one account.

Investment Limits:

Minimum annual contribution is ₹500; the maximum is ₹1.5 lakh. Contributions can be made in lump sum or in up to 12 installments per financial year.

Interest Rate:

The government determines the PPF interest rate, subject to quarterly revisions. Interest is compounded annually and credited at the end of each financial year.

Tenure:

The PPF account has a 15-year tenure, extendable in 5-year blocks upon maturity, with or without additional contributions.

Tax Benefits:

PPF contributions are eligible for tax deduction under Section 80C, up to ₹1.5 lakh annually. Interest earned and maturity proceeds are tax-free.

Withdrawals:

Partial withdrawals are allowed from the 7th financial year, subject to limits based on the account balance.

Loans Against PPF:

Loans can be taken against the PPF balance from the 3rd to the 6th financial year, capped at 25% of the balance at the end of the 2nd preceding year.

Compounding:

Annual compounding of interest significantly boosts the growth of savings over time.

Risk-Free Investment:

PPF is a government-backed, risk-free investment, ideal for conservative investors seeking steady retirement savings growth.

Benefits of Public Provident Fund (PPF)

Tax Benefits: Contributions up to ₹1.5 lakh per annum are tax-deductible under Section 80C; interest and maturity proceeds are tax-free.

Safe and Secure Investment: Government-backed, offering high safety with negligible risk of default.

Attractive Interest Rates: Higher interest rates compared to other fixed-income options, compounded annually.

Long-Term Investment: 15-year tenure with an option to extend in 5-year blocks.

Loan Facility: Loans available against the PPF balance from the 3rd to 6th year.

Partial Withdrawals: Allowed from the 7th year for financial emergencies.

Compounding Benefits: Annual compounding significantly boosts returns.

No Attachment: Balances are protected from court attachments and creditors.

Universal Accessibility: Accounts can be opened at post offices and authorized banks across India.

Flexibility in Contributions: Contributions between ₹500 and ₹1.5 lakh can be made in lump sum or up to 12 installments.

Tax Calculation of Public Provident Fund (PPF)

Tax Deduction on Contributions:

Contributions up to ₹1.5 lakh per financial year are deductible under Section 80C, reducing taxable income.

Tax-Free Interest:

Interest earned on the PPF is completely tax-free each year.

Tax-Free Maturity:

The maturity amount, including both principal and interest, is tax-free, making PPF an EEE (Exempt-Exempt-Exempt) investment.

Example Calculation:

Annual Contribution: ₹1.5 lakh.
Interest Rate: 7.1% per annum, compounded annually.
Total Investment Over 15 Years: ₹22.5 lakh.
Maturity Amount: Approximately ₹39,04,200.

Tax Benefits:

Yearly Tax Deduction: ₹1.5 lakh contribution reduces taxable income by ₹1.5 lakh each year. At a 30% tax bracket, this results in annual tax savings of ₹45,000.
Tax-Free Interest: Interest earned is tax-free. For example, if the first year’s interest is ₹10,650, it is not added to taxable income.
Tax-Free Maturity: The entire maturity amount of ₹39,04,200 is tax-free.

Summary:

Initial Investment: ₹1.5 lakh per annum.
Total Investment Over 15 Years: ₹22.5 lakh.
Maturity Amount After 15 Years: ₹39,04,200 (tax-free).
Tax Savings Per Year: ₹45,000 (assuming a 30% tax bracket).
Total Tax-Free Interest Earned: Approximately ₹16,54,200.

How is Interest on PPF Calculated?

The interest calculation for PPF takes place on a monthly basis. However, such interest is added to the balance in a PPF account at the end of every financial year. Furthermore, such monthly calculation takes place in the following manner –

The lowest balance in a PPF account on a specific month’s 5th date and that month’s end date is considered for interest calculation for that month.

For instance, if a PPF account shows a balance of Rs.500 on 5th January and Rs.1500 on 31st January, then interest for January will be calculated on Rs.500 and not Rs.1500.

Therefore, if a person deposits on any date after 5th, they will not be able to enjoy any interest on that contribution for that specific month. Therefore, a PPF account holder should make any additional deposit for a specific month before 5th of that month to maximise their PPF returns.

As an example, let’s assume Ramesh has started a PPF account from April 2019. At the end of FY 2018 – 19, he had Rs.1.5 lakh as balance, including that year’s interest. He makes a monthly deposit of Rs.5000 on 10th of every month. The table below illustrates the interest calculation for his PPF

Months	Balance Considered for Interest Calculation	PPF Rate of return	Interest
April	150,000	7.9	988
May	155,000	7.9	1020
June	160,000	7.9	1053
July	165,000	7.9	1086
August	170,000	7.9	1119
September	175,000	7.9	1152
October	180,000	7.9	1185
November	185,000	7.9	1218
December	190,000	7.9	1251
January	195,000	7.9	1284
February	200,000	7.9	1317
March	205,000	7.9	1350
Total	Nil	Nil	14023

Now, let’s consider an alternative example. In this instance, Ramesh makes his monthly deposits on the 4th of every month. The table below represents the interest calculation for his PPF account.

Months	Balance Considered for Interest Calculation	PPF Rate of return	Interest
April	155,000	7.9	1020
May	160,000	7.9	1053
June	165,000	7.9	1086
July	170,000	7.9	1119
August	175,000	7.9	1152
September	180,000	7.9	1185
October	185,000	7.9	1218
November	190,000	7.9	1251
December	195,000	7.9	1284
January	200,000	7.9	1317
February	205,000	7.9	1350
March	210,000	7.9	1383

As can be seen, in the latter case , the PPF account return was higher by Rs.359. As this effect is compounded over 15 years, the potential increase in yields while making deposits before 5th of every month is substantially higher than when making deposits after 5th.

Historical PPF Rates of Returns

The following table demonstrates the rates of return on PPF for the last 2 years.

Period	Interest Rates
October to December 2022	7.1%
July to September 2022	7.1%
April to June 2022	7.1%
January to March 2022	7.1%
October to December 2021	7.1%
July to September 2021	7.1%
April to June 2021	7.1%
January to March 2021	7.1%
October to December 2020	7.1%
July to September 2020	7.1%
April to June 2020	7.1%
January to March 2020	7.90%
October to December 2019	7.90%
July to September 2019	7.90%
April to June 2019	8.0%
January to March 2019	8.0%
October to December 2018	7.8%
July to September 2018	7.8%
April to June 2018	7.9%

While investing over a period of time has given investors substantial PPF returns, Individuals must duly weigh it against other investment options and their performances prior to deciding on PPF as an avenue for their savings.

Comparison of PPF Returns

PPF vs. Bank FD Returns:

PPF Interest Rate: 7.1% per annum.

Bank FD Rates: Typically 3% – 6.9%, with some banks like DCB offering 5.4% – 7.9%.

Maturity Period: PPF has a longer tenure compared to most Bank FDs.

Tax Benefits: PPF offers tax benefits under Section 80C, whereas Bank FD returns do not.

PPF vs. NPS Returns:

NPS Returns: Not guaranteed; depends on asset allocation by fund managers and can vary.

PPF Returns: Guaranteed and fixed, making it less risky compared to NPS.

Suitability: NPS may be suitable for those with higher risk tolerance.

PPF vs. ELSS Returns:

ELSS Returns: Higher potential returns due to market-linked investments in stocks.

PPF Returns: Fixed and lower compared to ELSS.

Liquidity: ELSS has a 3-year lock-in period vs. PPF’s 15 years.

Suitability: ELSS is better for higher risk tolerance, while PPF suits conservative investors.

Tax Benefits on PPF Returns:

Tax Deduction: Contributions up to ₹1.5 lakh per year are deductible under Section 80C.

Interest and Maturity: Both the interest earned and maturity proceeds are tax-free.

The Public Provident Fund (PPF) is a highly attractive investment option for those seeking a blend of safety, appealing returns, and tax advantages. Government-backed and with a 15-year tenure (extendable in 5-year blocks), it promotes disciplined long-term savings. Contributions are tax-deductible under Section 80C, and both the interest earned and maturity proceeds are tax-free, making it an EEE (Exempt-Exempt-Exempt) instrument. With annual compounding enhancing growth and features like partial withdrawals and loans providing flexibility, PPF is ideal for building a substantial retirement corpus and optimizing tax planning.

Public Provident Fund (PPF)