PPF:: Much more than tax saving

In this post, I will share my experience with PPF(Public Provident fund) which is one of the most popular investment-cum-tax-saving instrument in India.

 

Let’s start with the meaning of the word. 

provident
adjective
making or indicative of timely preparation for the future. 

Doesn’t it sound similar to retirement planning?

 

Quick facts on PPF

• The scheme is fully guaranteed by the Central Government.
• The Ministry of Finance, Government of India announces the rate of interest for PPF account every quarter.
• The current interest rate effective from 1 Jan 2021 to 31st March 2021 is 7.1% Per Annum(compounded annually). Interest will be paid on 31 March every year.
• PPF rate history can be found here -> https://freefincal.com/ppf-interest-rate-history-1968-to-present/
• Interest is calculated on the lowest balance between the close of the fifth day and the last day of every month.
• Original duration is 15 years. Thereafter, on application by the subscriber, it can be extended for 1 or more blocks of 5 years each.
• Interest earned on investments is tax-free.

 

My investments

I opened my PPF account in FY 2008-09 which was 1 year after starting my first job. The primary reason for opening the account was tax saving u/s 80C. In subsequent years, I continued investing in PPF to balance any deficit in the 80C limit(1.5 LPA). However, after realizing its importance for retirement planning I’ve started to invest fully since last 2 years.

Below is a summary of my investments and interest earned over the last 11 years.

FY	Investment amount	Interest earned
2008-09	30,000	800
2009-10	46,000	3,384
2010-11	70,000	11,048
2011-12	50,000	16,988
2012-13	5,000	20,487
2013-14	35,000	25,118
2014-15	65,000	28,245
2015-16	60,000	40,200
2016-17	50,000	44,185
2017-18	1,50,000	56,451
2018-19	1,50,000	73,767
2019-20	1,50,000	92,648
2020-21	1,50,000	tbd
Total	10,11,000	4,13,321

Due to the magic of compounding, the interest generation increases significantly during the later years. If I had invested fully in PPF every year, the returns would have been much higher. Thus, it is one of the financial mistakes that I regret.

 

My learning and suggestions

• PPF is an exceptional investment for retirement planning as it offers good interest rates, tax-free returns and a 15-year lock-in which is great for compounding.
• Open PPF account in a bank where you have a savings/salary account. It’s much easier to manage the account online compared to a post office PPF account.
• To reap the full potential of PPF, invest the maximum permissible limit before April 5th at the beginning of every financial year.
• Avoid premature withdrawals unless there is an emergency.
• 2021 Update: Although the interest rates of PPF have gone down below 8% after June 2019, its still a good and extremely safe option for long-term investment. 

How do you find PPF as an investment option? Please share in the comments section.