PPF: Know the disadvantages of Public Provident Fund
Public Provident Fund, or the PPF, is one of those instruments that have survived the transition of the Indian economy from a controlled one to a market-oriented one and yet has retained much of its popularity. However, with the advent of modern market-linked instruments, PPF returns have lost much of its sheen.
Kolkata: Public Provident Fund, or the PPF, was introduced way back in 1968 with a view to offering an instrument of long-term investment instrument for the common people in India. As the name implies, it was a type of "provident fund" but one that did not carry with it the condition that the beneficiary has to be employed. Just about anyone could open a PPF account, a feature that remains in force to this day.
The PPF carries a lot of benefits. One it carries a sovereign guarantee on principal capital and interest, Two, it offers income tax deductions. Three, it can be stretched virtually endlessly -- for blocks of 5 years after the initial lock-in period of 5 years has ended. Four, the fact that one can open a PPF account for minors actually add to the period of long-term savings with the full force of long term compounding. But then, what was ideal in a controlled economy began to lose its lustre as the economy began transition to a market-oriented one in the 1990s. Let's have a look at the question marks over PPF in the recent years.
PPF investment period
PPF suffers an unusually long lock-in period -- 15 years. Therefore, you cannot withdraw funds earlier. So liquidity is a concern. Significantly, before a period of 5 years has passed from the date of opening the PPF account, you cannot withdraw any money at all. Also premature withdrawal from a PPF account is possible only under certain conditions such as medical emergencies, payment for higher education etc. This limited withdrawal is deemed as a severe constraint.
PPF Interest rate
Currently PPF offers an interest rate of 7.1%. Compared to secure invest such as bank Fixed Deposits (FD), this rate might not be quite attractive. Compared to mutual fund SIPs -- to which an increasing number of Indian middle-class investors are gravitating every month -- this rate is significantly lower. SIP returns in equity-linked funds exceed 10% with ease. Even guaranteed-return instruments such as Senior Citizen Saving Scheme (SCSS) and Sukanya Samriddhi Yojana (SSY) carry significantly higher interest rates -- 8.2%. Interestingly, PPF used to offer 12% interest rate between 1986 and 2000.
PPF carries an annual investment cap of Rs 1.5 lakh a year. This has remained unchanged for decades. A lot of people earn a hell of a lot more these days and might want to invest more, but PPF doesn't allow it. Therefore, it is not suitable for those who want to put in big amounts.
PPF in New Income Tax regime
Income tax deductibility was one of the biggest USPs of the PPF. It was a E-E-E scheme which meant tax deductions was available on the principal, interest and maturity amount no matter whatever the final amount. But a lot of people have migrated to the new income tax regime that does not offer income tax reliefs at all, leading to the erosion of this significant benefit.