PPF
Definition
Public Provident Fund — a government-backed 15-year savings scheme with sovereign guarantee, EEE tax status (contributions, interest, and maturity all exempt), and interest rate set quarterly by the government.
Detailed Explanation
PPF (Public Provident Fund) is one of India's most trusted long-term savings instruments, backed by the full faith of the Government of India. It offers a rare triple tax exemption — called EEE status — meaning: (1) Your contributions qualify for deduction under Section 80C (up to Rs.1.5 lakh/year), (2) Interest earned is completely tax-free, (3) Maturity amount is fully tax-free.
Key features: Tenure is 15 years (extendable by 5-year blocks). Minimum deposit: Rs.500/year. Maximum: Rs.1.5 lakh/year. You can make up to 12 deposits per year. The interest rate is revised quarterly by the Government (currently 7.1% p.a., compounded annually). Interest is calculated on the lowest balance between the 5th and last day of each month — so always deposit before the 5th.
Liquidity: Partial withdrawal is allowed from the 7th financial year (up to 50% of balance at end of 4th year or preceding year, whichever is lower). Loans against PPF balance are available from the 3rd to 6th year.
PPF is ideal for: Conservative investors, those in higher tax brackets (where FD interest is heavily taxed), parents opening accounts for minors, and anyone wanting a risk-free retirement corpus alongside EPF.
The main downside: The 15-year lock-in makes it inflexible. Returns (7.1%) are lower than historical equity returns (10%–15%). For young investors with a higher risk appetite, ELSS or equity mutual funds may be more suitable.
Key features: Tenure is 15 years (extendable by 5-year blocks). Minimum deposit: Rs.500/year. Maximum: Rs.1.5 lakh/year. You can make up to 12 deposits per year. The interest rate is revised quarterly by the Government (currently 7.1% p.a., compounded annually). Interest is calculated on the lowest balance between the 5th and last day of each month — so always deposit before the 5th.
Liquidity: Partial withdrawal is allowed from the 7th financial year (up to 50% of balance at end of 4th year or preceding year, whichever is lower). Loans against PPF balance are available from the 3rd to 6th year.
PPF is ideal for: Conservative investors, those in higher tax brackets (where FD interest is heavily taxed), parents opening accounts for minors, and anyone wanting a risk-free retirement corpus alongside EPF.
The main downside: The 15-year lock-in makes it inflexible. Returns (7.1%) are lower than historical equity returns (10%–15%). For young investors with a higher risk appetite, ELSS or equity mutual funds may be more suitable.
Formula:
PPF Maturity = P × [((1 + r)^n - 1) / r] × (1 + r)Where: P = Annual deposit, r = Annual interest rate, n = Number of years
Example
Amit deposits Rs.1.5 lakh every year in PPF for 15 years. Total investment: Rs.22.5 lakh. At 7.1% compounded annually, his maturity amount is approximately Rs.40.68 lakh — completely tax-free. If he extends for another 5 years (total 20 years), the corpus grows to approximately Rs.66.5 lakh.
Frequently Asked Questions
Full withdrawal is only allowed at maturity (15 years). However, partial withdrawal is allowed from the 7th financial year — up to 50% of the balance at the end of the 4th year or the year immediately preceding the withdrawal, whichever is lower. You can also take a loan against your PPF from the 3rd to the 6th year (up to 25% of balance).
EEE means Exempt-Exempt-Exempt. (1) Investment: Contributions up to Rs.1.5 lakh/year deductible under Section 80C. (2) Interest: Annual interest earned is completely exempt from income tax. (3) Maturity: The entire lump sum at maturity is tax-free. This makes PPF one of the most tax-efficient instruments, especially for those in the 20%–30% tax slab.
PPF interest is calculated on the minimum balance between the 5th and last day of each month. So deposit on or before April 5th every year to earn interest for the entire year. If you deposit after the 5th, you lose interest for that month. Lump-sum deposit at the start of the year (before April 5th) maximises returns vs. monthly instalments.
Yes, parents/guardians can open a PPF account in a minor child's name. However, the combined annual contribution to the guardian's own PPF and the minor's PPF cannot exceed Rs.1.5 lakh. The minor's account matures 15 years after opening. When the child turns 18, they can manage the account independently.
PPF: 15-year lock-in, guaranteed ~7.1%, completely tax-free, zero risk. ELSS: 3-year lock-in, market-linked (historically 12%–15% CAGR), LTCG above Rs.1.25 lakh taxed at 12.5%, market risk. For young investors (< 40 years), ELSS offers far higher wealth creation potential. For conservative investors or those near retirement, PPF's safety and tax-free returns are unmatched. Ideally, use both for diversification.