Guide To PPF Interest Rates And Taxation For New Investors

Public Provident Fund (PPF) interest rates remain attractive, although many banks have raised the rates on fixed deposits. The PPF rate has been fixed at 7.1 per cent for the quarter-ending September 2022. At the current rate, PPF is a great debt instrument for the long term, can help save tax, and assures protection of savings due to its fungibility aspect.

PPF Features

The minimum and maximum investment in PPF annually are Rs 500 and Rs 1,50,000 lakh, respectively. It comes with a tenure of 15 years, and can be renewed thereafter in blocks of five years. However, partial withdrawals from the PPF account are allowed from the 6th year of account opening. “Only one partial withdrawal is allowed per financial year, and it is limited to 50% of the balance in the account,” says Abhijit Talukdar, SEBI Registered Investment Adviser and founder of Attainix Consulting.

PPF Interest Rates

Interest rates in PPF are revised quarterly. The PPF interest rate is hence ‘assured’ and ‘not fixed’. For instance, the interest rate in PPF was 8 per cent in April-June 2019; it was 7.9 per cent in January-March 2020, 7.1 per cent in April-June 2020, and 7.1 per cent in April-June 2021.

Since PPF is a long-term instrument (15 years or more if extended), the interest rate in PPF is often compared with 10-year government G-Sec, but this is only for people’s reference. The government has not specified any benchmark for PPF.

PPF Taxation

Contribution to PPF is eligible for deduction u/s 80C of the Income-tax Act, 1961.

The instrument enjoys the EEE status. Chartered Account Ankur Aggarwal explained that PPF is one of the few financial instruments that generally enjoys an EEE taxation status. EEE means that a PPF is eligible for tax exemption (80C) at the time of purchase (when deposits are made to a PPF), during the course of holding the instrument (accrued interest is tax free), and also tax free at the time of maturity of the instrument (withdrawal of balance after lock-in period). Hence, EEE is ‘exempt exempt exempt’ taxation status.

Talukdar further said that young people may avail PPF in case they do not have a PF scheme from their employer or if they are self-employed. “It is likely that a young person may have some balance in this limit after her PF deductions and insurance payments. In this case, (the person) can invest in PPF to avail the full benefit of section 80C,” he added.

Long-Term Returns From PPF

Recently, Aditya Kothari, a retail marketing professional from Mumbai, shared with us his experience of contributing to PPF from an early age.

Kothari said that when he got his first job 20 years ago, he opened his PPF account with the bare minimum amount required. But as he progressed in his career, he saw the impact of a secured government-backed fixed compound interest growth, and with the added tax benefit, he could potentially save a large sum of money both for the present (80C deduction) and future (Exempt Income). 

Though, predicting the final returns is difficult since interest rates are revised every quarter, assuming the rates remain at 7.1 per cent, PPF can give handsome returns.

Rachit Chawla, founder and CEO of Finway, a financial services company, told Outlook Money that “Investing at any age is beneficial for an individual and starting to invest at an early age has multifold advantages in securing the future. Investing from the early stage of the career also improves one’s spending habits and allows him/her to stay ahead of others; thereby improving the quality of life.”

Parul Maheshwari, a certified financial planner, said the new interest rate “is applicable to the entire balance. So, it is difficult to predict the final returns you will earn on your invested amount.”

Talukdar shared an interesting analogy wherein by the rule of 72, in approximately 10 years the money in PPF will double, assuming the interest rate to remain at 7.1 per cent.

“PPF offers the benefit of compounding. Hence, at a 7.1 per cent rate of interest, an investment made today in PPF will double in 10 years as per the rule of 72 (72 divided by 7.1 = approx 10 years),” added Talukdar.

Fungibility Benefit In PPF

Maheshwari added that if a person has taken any loan from a financial institution or bank and has not been able to repay it due to any reason and the bank, through an attachment order authorised by the court, claims your investments, property or other assets for recovery of the loan. They can do so, but they “cannot freeze the PPF account. In short, the PPF account enjoys the protection of credit balance from attachment.”