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 channeling such funds to appreciate their 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.
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 2023, the Indian government has revised the return rate for PPF at 7.1%. 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.
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 5th of that month to maximise 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 10th of every month. The table below illustrates the interest calculation for his PPF account.
| Month | Balance considered for interest calculation (Rs.) | PPF rate of return (%) | Interest (Rs.) |
| April | 150,000 | 7.9 | 988 |
| May | 155,000 | 7.9 | 1020 |
| June | 160,000 | 7.9 | 1053 |
| July | 165,000 | 7.9 | 1086 |
| August | 170,000 | 7.9 | 1119 |
| September | 175,000 | 7.9 | 1152 |
| October | 180,000 | 7.9 | 1185 |
| November | 185,000 | 7.9 | 1218 |
| December | 190,000 | 7.9 | 1251 |
| January | 195,000 | 7.9 | 1284 |
| February | 200,000 | 7.9 | 1317 |
| March | 205,000 | 7.9 | 1350 |
| Total | Nil | Nil | 14,023 |
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.
| Month | Balance considered for interest calculation (Rs.) | PPF rate of return (%) | Interest (Rs.) |
| April | 155,000 | 7.9 | 1020 |
| May | 160,000 | 7.9 | 1053 |
| June | 165,000 | 7.9 | 1086 |
| July | 170,000 | 7.9 | 1119 |
| August | 175,000 | 7.9 | 1152 |
| September | 180,000 | 7.9 | 1185 |
| October | 185,000 | 7.9 | 1218 |
| November | 190,000 | 7.9 | 1251 |
| December | 195,000 | 7.9 | 1284 |
| January | 200,000 | 7.9 | 1317 |
| February | 205,000 | 7.9 | 1350 |
| March | 210,000 | 7.9 | 1383 |
| Total | Nil | Nil | 14,418 |
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 5th of every month is substantially higher than when making deposits after 5th.
The following table demonstrates the rates of return on PPF for the last 2 years.
|
Period |
Interest Rates |
|
October to December 2022 |
7.1% |
|
July to September 2022 |
7.1% |
|
April to June 2022 |
7.1% |
|
January to March 2022 |
7.1% |
|
October to December 2021 |
7.1% |
|
July to September 2021 |
7.1% |
|
April to June 2021 |
7.1% |
|
January to March 2021 |
7.1% |
|
October to December 2020 |
7.1% |
|
July to September 2020 |
7.1% |
|
April to June 2020 |
7.1% |
|
January to March 2020 |
7.90% |
|
October to December 2019 |
7.90% |
|
July to September 2019 |
7.90% |
|
April to June 2019 |
8.0% |
|
January to March 2019 |
8.0% |
|
October to December 2018 |
7.8% |
|
July to September 2018 |
7.8% |
|
April to June 2018 |
7.9% |
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 on PPF as an avenue for their savings.
Both 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 which 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.
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.
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.
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.
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