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Savings as a practice is an essential exercise to secure yourself financially. However, keeping the rising costs of living and inflation in mind, it does not suffice to merely apportion a part of one’s income as savings while letting it sit idly. It is also crucial to opt for a suitable avenue for channelling such funds to appreciate its value. Here’s where a Public Provident Fund with guaranteed PPF returns and sovereign backing as well as tax benefits, comes to the aid of such investors.

Public Provident Fund

It is a savings scheme that the Government of India offers to resident Indians, including employees, students, self-employed individuals, and retired persons. A Public Provident Fund account carries a lock-in period of 15 years, and an account-holder must make deposits every year, as per PPF rules.

The Government of India revises the PPF return rate every quarter, which is set based on the rate of returns on government bonds. For the first quarter of the Financial Year 2020 – 21 (April – June), the Indian government has revised the return rate for PPF at 7.1%, which was 7.9% in the previous quarter. The Indian government is responsible for paying the returns to account-holders.

The Public Provident Fund is one of the safest investment options since it receives the backing of the central government, and chances of capital loss are negligible. Another winning point of PPF is the effect of compounding. Due to compounding and a considerably long tenure (15 years), PPF subscribers stand to gain substantially from Public Provident Fund returns.

How is Interest on PPF Calculated?

The interest calculation for PPF takes place on a monthly basis. However, such interest is added to the balance in a PPF account at the end of every financial year. Furthermore, such monthly calculation takes place in the following manner –

The lowest balance in a PPF account on a specific month’s 5th date and that month’s end date is considered for interest calculation for that month.

For instance, if a PPF account shows a balance of Rs.500 on 5th January and Rs.1500 on 31st January, then interest for January will be calculated on Rs.500 and not Rs.1500.

Therefore, if a person deposits on any date after 5th, they will not be able to enjoy any interest on that contribution for that specific month. Therefore, a PPF account holder should make any additional deposit for a specific month before the 5th of that month to maximize their PPF returns.

As an example, let’s assume Ramesh has started a PPF account from April 2019. At the end of FY 2018 – 19, he had Rs.1.5 lakh as balance, including that year’s interest. He makes a monthly deposit of Rs.5000 on the 10th of every month. The table below illustrates the interest calculation for his PPF account.

MonthBalance considered for interest calculation (Rs.)PPF rate of return (%)Interest (Rs.)
April150,0007.9988
May155,0007.91020
June160,0007.91053
July165,0007.91086
August170,0007.91119
September175,0007.91152
October180,0007.91185
November185,0007.91218
December190,0007.91251
January195,0007.91284
February200,0007.91317
March205,0007.91350
TotalNilNil14,023

Now, let’s consider an alternative example. In this instance, Ramesh makes his monthly deposits on the 4th of every month. The table below represents the interest calculation for his PPF account.

MonthBalance considered for interest calculation (Rs.)PPF rate of return (%)Interest (Rs.)
April155,0007.91020
May160,0007.91053
June165,0007.91086
July170,0007.91119
August175,0007.91152
September180,0007.91185
October185,0007.91218
November190,0007.91251
December195,0007.91284
January200,0007.91317
February205,0007.91350
March210,0007.91383
TotalNilNil14,418

As can be seen, in the latter case, the PPF account return was higher by Rs.359. As this effect is compounded over 15 years, the potential increase in yields while making deposits before the 5th of every month is substantially higher than when making deposits after the 5th.

Historical PPF Rates of Returns

The following table demonstrates the rates of return on PPF for the last 2 years.

Quarter PPF Returns
1st Quarter of FY 2018 – 19 (April ‘18 – June ‘18)7.9%
2nd Quarter of FY 2018 – 19 (July ‘18 – September ‘18)7.8%
3rd Quarter of FY 2018 – 19 (October ’18 – December ‘18)7.8%
4th Quarter of FY 2018 – 19 (January ’19 – March ‘19)8%
1st Quarter of FY 2019 – 20 (April ‘19 – June ’19)8%
2nd Quarter of FY 2019 – 20 (July ’19 – September ’19)7.9%
3rd Quarter of FY 2019 (October ’19 – December ’19)7.9%
4th Quarter of FY 2019 – 20 (January ’20 – March ’20)7.9%
1st Quarter of FY 2020 – 21 (April ’20 – June ’20)7.1%

While investing over a period of time has given investors substantial PPF returns, Individuals must duly weigh it against other investment options and their performances prior to deciding PPF as an avenue for their savings.

PPF Returns as Compared to Bank FD Returns

Both the Public Provident Fund and Bank Fixed Deposits are fixed-income instruments. Therefore, the comparison between their returns provides valuable insight into the more profitable but safe investment avenue for individuals.

In this quarter, PPF offers an interest rate of 7.1%; whereas most banks are offering FD returns in the range of 3% – 6.9% for general citizens. There are exceptions to this like DCB Bank that is offering yields in the range of 5.4% – 7.9%.

Moreover, PPF carries a longer maturity period compared to most Bank FDs. However, FD returns do not bring any tax benefits, unlike PPF returns. Therefore, individuals must duly weigh their options against their monetary needs before making any decision.

PPF Returns as Compared to NPS Returns

NPS returns are not guaranteed, as opposed to PPF returns. The former depends on the asset allocation by a fund manager. Therefore, it can yield higher or lower returns compared to PPF. Thus, NPS might be more suitable for individuals with a higher-risk aptitude.

PPF Returns as Compared to ELSS Returns

ELSS Returns predominantly depend on the value of its underlying stocks. Therefore, its potential to earn returns is considerably higher than that of PPF. Moreover, it also enjoys tax benefits similar to PPF. ELSS also scores over PPF when it comes to liquidity as the lock-in is just 3 years.

However, being an equity fund, ELSS is a market-linked instrument and is suited for individuals with comparatively higher risk tolerance.

Tax Benefits on PPF Returns

The Public Provident Fund is a primary tax-saving instrument. All deposits made in a PPF account in a specific year are eligible for exemption under Section 80C of the Income Tax Act subject to a maximum of Rs.1.5 lakh. Moreover, the interest earned from a PPF account and PPF returns taxable are not considered during an individual’s tax calculation.

It can, thus, be concluded that individuals with a long-term investment plan and low-risk aptitude might find PPF a good investment instrument – both by virtue of its returns and tax benefits.

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