PPF: Five limitations of a much-preferred instrument

Public provident fund (PPF) is one of the best long-term savings instruments. A large section of the common people put their hard-earned money in PPF. But are you aware of the limitations of this hugely popular instrument? 

Features of PPF

Public Provident Fund is an investment product that falls under ‘EEE’ category. It means the invested amount, interest income and maturity amount are exempted from income tax.

Currently it offers 7.1% annual return and this interest rate is revised quarterly. Another attractive feature of PPF is it comes under section 80C of IT Act with a deduction limit of Rs 1.5 lakh every year.

Limitations of PPF

There are, however, a few limitations in PPF. These are:

Low interest rate

Currently PPF gives 7.1% yearly returns and this comes up for revision every quarter. “If you look at the interest rate movement you can notice how dramatically it came down from almost 9% to 7.1% in a few years. Between April 2012 and March 2017, the interest rate was hovering between 8% and 8.8%. Again in 2019 (Jan-June) the interest rate was at 8%, but after it drastically came down to 7.1% and probably it will decline further in the near future,” Sweta Jain, founder, Investography told Money9.

If you invest in any of the debt mutual fund, it can provide higher returns than PPF. If you invest in a debt fund for 15 long years, it would give you a minimum return of 8%,” said Nilotpal Banerjee, a personal finance expert from Kolkata.

Fixed return

PPF gives you fixed return, currently 7.1%. If inflation rates cross 6%, it erodes a lot of the appreciation that the instrument provides.

On the other hand, market-linked investment options might give an individual much higher return. However, the risk is also superscripted with the rate of high return.

Long lock-in period

PPF has a default lock-in period of 15 years. Before 15 years the money can’t be withdrawn except in a few emergency requirements.

On the other hand if you put your money into mutual fund, then it can be withdrawn anytime during the tenure. This absence of liquidity is one of the negative factors of PPF.

Investment limit

One can put a maximum of Rs 1.5 lakh into a PPF account. If anyone puts more than that amount, it would become taxable.

“In MFs or FDs you don’t have any such limit. You can put as much money as you wish,” said Banerjee.

Only one account

A person can only have one PPF account. “More than one PPF account is not permissible for an individual, “said Jain.

If anybody has more than one account by mistake, then one account need to be closed,” she added further.

Benefits of PPF

 Contributions up to Rs 1.5 lakh a year in PPF qualifies for income tax deduction while the interest earned and the maturity are also tax-free. If you withdraw money from PPF fully or partially, both are fully tax-free.

PPF gives fixed yet safe and secure return to an individual despite the market situation and other factors.

PPF gives long term benefits to an individual. After 15 years a PPF account can be extended in five-year blocks indefinitely. PPF can be started with Rs 500, and the higher limit is set at Rs 1.5 lakh.