PPF: When is Public Provident Fund NOT the right investment for you?

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Updated: October 4, 2018 8:57:33 AM

PPF has been a preferred choice for investment for the common investors for long. However, it has its own limitations and you must be aware of them before investing in this product.

PPF, Public Provident Fund, PPF calculator, PPF account, PPF interest rate, PPF rules, PPF withdrawal PPF is not a great idea if you are looking at liquidity. The PPF account has a tenure of 15 years and the first withdrawal is permitted only after 7 years with limitations.

The Public Provident Fund, commonly known as PPF, has remained a preferred choice for investment for the risk-averse investors for many years now. And not without reasons. Apart from many other benefits, PPF has been providing decent returns and gives income tax benefits which are provided by only a limited number of investment instruments. Still, PPF has its own limitations and may not be suitable for everyone. Therefore, you must be aware of these limitations before investing in this product.

“For many years since its launch in 1968, the PPF was a preferred product for tax savings among the middle class as well as the wealthy. Back then, PPF offered handsome returns of 12% annually, plus triple stage tax benefits at the time of investment, on interest receipts and on redemption. This made the PPF extremely attractive in post-tax terms,” says Vaibhav Agrawal, Head of Research and ARQ, Angel Broking.

However, before you jump onto PPF as a product, here are some key things you should keep in mind:

# PPF interest rates have been consistently on a downtrend. Although the rate has now been revised to 8% – effective from October 1 this year — from the earlier 7.6%, but this too is not very attractive currently. So, the Public Provident Fund is not the right product for people looking for higher returns. In fact, “PPF has been linked to the market interest rates and any large anomaly is unlikely to exist for too long,” says Agrawal.

# PPF is not a great idea if you are looking at liquidity. The PPF account has a tenure of 15 years and the first withdrawal is permitted only after 7 years with limitations. Even loans can be availed against PPF only at the end of 3 years and that too partially. Therefore, PPF may not be for you if you are looking for an investment for a shorter term, say 2 to 3 years.

# PPF has limited utility as a family saving tool. “The simple reason is that unlike most of the other assets, PPF cannot be jointly owned. For example, you and your spouse cannot be joint owners of a PPF account. It has to be either in the name of the individual or it has to be held with minors. Two adults cannot be the joint holders of a PPF account,” says Agrawal.

Thus, if you want to invest in a product as a family saving tool, then PPF is not for you.

# Also, unlike most of the other investment avenues like equities and mutual funds, PPF is not open to NRIs. Of course, if you had a PPF when you were a resident Indian, then you can continue to contribute to the PPF account even after you become an NRI. But NRIs are not permitted to open a fresh PPF account. Also, trusts and HUFs are not permitted to invest in the PPFs.

# You will be surprised to know that there is an upper cap on the investments in PPF. For example, “you cannot invest more than Rs 1.50 lakh in any financial year in the PPF account. This is contrary to other instruments like ELSS where there is really no upper limit on how much you can invest. Of course, the tax exemption in the case of ELSS is restricted to Rs 1.50 lakh only, but there is no limit on investment,” informs Agrawal.

Thus, if you want to invest more than Rs 150,000 in any financial year in a single product, then PPF is not for you.

# Last, but not the least, if you are working in an organization and are already contributing to an EPF account as per statutory requirements, then your tax benefit will be limited on your PPF investment, but can continue with the investment.

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