Start, maintain Public Provident Fund account, even in new tax regime

The government expects investments in small savings instruments, especially Public Provident Fund (PPF), to plummet sharply in 2024-25 with over 70 per cent of taxpayers gravitating to the new tax regime, where they will not be eligible for the Section 80C tax deduction. Should investors opting for the new tax regime invest in PPF, purely for its merits as an investment product?

High, tax-free returns

PPF remains attractive even without the Section 80 C deduction. “The tax-free return of 7.1 per cent is very attractive. While the Employees Provident Fund (EPF) offers a higher return of 8.25 per cent which is tax-free for contributions up to Rs 2.5 lakh, it terminates upon retirement. PPF can be extended for life,” says Deepesh Raghaw, a Sebi registered investment advisor (RIA).

Since PPF is a government-backed scheme, it offers full capital protection and guaranteed, risk-free return. “PPF carries minimal risk. Its fixed-income nature allows investors to diversify their portfolios,” says Jinal Mehta, founder, Beyond Learning Finance.

PPF becomes flexible after the initial 15-year maturity period ends. It can be extended in blocks of five years. Extensions can happen without or with contribution. “If the account is extended without contribution (the default option), your money compounds tax-free and you can withdraw any amount from the account whenever you like,” says Raghaw.

An investor who extends the account with contribution can make only one withdrawal in each financial year. “Over the next five years, the investor can withdraw up to 60 per cent of the balance at the end of the financial year in which the account was extended,” says Raghaw. These features, according to him, make PPF a good pension instrument.

Low on liquidity

The long maturity period acts as a deterrent, especially for younger investors who desire liquidity. “However, partial withdrawals are allowed beginning from the sixth fiscal year following the original subscription period,” says Mehta.

One can’t invest beyond Rs 1.5 lakh in each account in a financial year. No monetary limit exists in mutual funds or the National Pension System (NPS).

Non-resident Indians (NRIs) and Hindu Undivided Families (HUFs) cannot invest in PPF.

Should existing investors continue?

Existing investors should continue with their PPF account even if they lose the Section 80C benefit. “The reason is tax efficiency: PPF interest income and maturity amount are tax-free. If you invest in other fixed-income instruments like fixed deposits or debt mutual funds, you have to pay taxes every year or at the time of withdrawal,” says Ajay Pruthi founder, plnr.in.

He adds that investors in the 30 per cent tax bracket would have to earn a 30 per cent higher pre-tax return in other fixed-income instruments to match PPF’s return, which is difficult.

Should youngsters open an account?

Mrin Agarwal, founder-director, Finsafe says young investors with the requisite investment horizon and a conservative profile should definitely go for PPF.

The low liquidity in PPF acts as a deterrent for some younger investors. But the lock-in can be an advantage. “It prevents impulsive withdrawal of funds and aids long-term savings,” says Pruthi.

Younger investors should first build an emergency corpus and then invest for short-term goals. “Thereafter, if they have money left, they can use PPF to fill up the fixed-income portion of their long-term portfolio,” says Raghaw. He adds they should start their PPF accounts at the earliest, even without the Section 80C benefit, to get past the 15-year maturity period at the earliest.

Loan available against PPF balance

>Loans can be taken by submitting a request at the bank branch or post office where the account is held

>It can be taken only after one year from the end of the fiscal year in which the initial subscription was made and must be repaid within five years

>The loan amount can be up to 25 per cent of the balance at the end of the second year immediately preceding the loan application

>Only one loan can be taken in a financial year; a second is not provided until the first is repaid

>If repaid in 36 months, the interest rate is 1 per cent per annum; if after 36 months, it is 6 per cent