Is it worth investing in PPF?

PPF has fallen out of favour with the introduction of new tax regime. It remains as one of the safest investments but the withdrawal of tax benefit changes the perspective on saving and investment.

Background

PPF has been the darling of tax payers for decades. A RISK-FREE instrument that is backed by the government, giving an ATTRACTIVE rate of interest that compounds and above these benefits, when it comes to taxation, it follows a EEE category (Exempt, Exempt, Exempt). This simply means that PPF is exempt at the stage of investment, exempt at the stage of interest (returns) and exempt at the time of withdrawal / maturity.

This exemption was available for a maximum investment of INR 1.50 lakhs every year such that if you have declared your total income to be INR 15 lakhs, for the purposes of tax calculation your total income will be considered only to be INR 13.50 lakhs. In addition to this, any interest accrued in your PPF account was also exempt from calculation of tax. The impact to the investor (or tax payer) was such that assuming highest tax bracket of 30%, your total (earnings + savings) was INR 56,400 on an investment of INR 1.50 lakhs.

Earnings-

Interest on PPF on investment of INR 1.50 lakhs at interest rate of 7.60% = INR 11,400.

Savings-

Reduction in tax assuming highest tax slab of 30% = 30% on investment of INR 1.50 lakhs = INR 45,000

Total of your (earnings + savings) = 11,400 + 45,000 = INR 56,400

Considering you were in the lowest tax bracket of 5% and yet managing to invest full INR 1.50 lakhs, your (earnings + savings) was still INR 18,900, which was still an attractive preposition.

The New Income Tax Regime

The Finance Minister introduced the New Income Tax Regime in the Budget of 2020 wherein tax slabs were altered and taxpayers were offered concessional rates. However, the taxpayers opting for the new tax regime could not claim several exemptions like HRA (house rent allowance), LTA (leave travel allowance) and exemptions mentioned under section 80C (PPF, Life insurance premiums, etc) and 80D (mediclaim premium). The government had smartly adjusted the rates in such a way that most people would opt for the new tax regime and people benefitted by paying lesser tax irrespective of their investments in instruments like PPF.

Consequently, the status of PPF still remains in the exempt category when it comes to interest and withdrawal, however, no benefits accrue to the taxpayer on new investments in PPF if they have opted for new tax regime. Hence, the savings part of (earnings + savings) is no longer available and PPF is reduced to just another debt instrument available in the market.

Should you still invest in PPF?

The biggest advantage of this scheme was that the government inculcated a savings habit among the whole nation. Everyone wanted to save tax for obvious reasons and what better remedy than the government legally giving a benefit to invest for one’s own good and at the same time not pay tax on it. However, when you take the tax savings out of equation, the whole perspective of investing and the question surrounding it changes.

The current tax free interest income of 7.1% that keeps compounding is still very attractive as is the benefit of the tax free nature of the principal when you withdraw it.

So the question that remains is that are you happy with such returns considering the withdrawal rules of PPF which allows you to withdraw entire corpus only after 15 years from the date of account opening (you could also withdraw 50% after 6 years).

On the other hand, if you are really ready to keep your money invested for 6-15 years period, you might also want to consider other investing instruments that have proven to be worthy wealth creators in the long run - mutual funds and equity. Since we know there are so many options to choose from in the market in either of these instruments, for the sake of simplicity, let’s just compare the returns generated by the Nifty 50 and Nifty 500 indices.

While the Nifty 50 consists of top 50 companies of India (by market capitalisation), Nifty 500 is a broader index consisting of the top 500 companies that also include midcaps and smallcaps. These indices will capture most of the companies present in the portfolios of equity shareholders as well as mutual fund portfolios.

Source: Indigenous Investors.

*PPF returns are considered at prevailing rate as on the date of article.

When we consider a period of 15 years, we do see a clear winner in the above table. We have taken this time period because that’s the lock in period for full withdrawal of PPF corpus.

Conclusion

PPF has surely fallen out of favour with the introduction of the new tax regime. It still remains as one of the safest investments available to common man (even safer than FDs) as there has been no structural change in the instrument or the way it is managed. It may not be the best asset class for someone who is on their wealth creation journey as they would ideally want to assume more risk in the quest to gain more returns. A simple investment in index funds will give enough diversification benefits while also acting as a wealth accumulator for the investor. On the other hand, it is important to note that PPF is still very attractive compared to its other debt peers. For anyone willing to park their funds for the long term to earn a decent return without assuming any risk, PPF remains as a very attractive investment choice.