Should PPF Be A Part Of Your Investment Portfolio?
Public Provident Fund (PPF) is one of the most preferred investment avenues by individuals looking for a long-term tax saving instrument with low risk to park their hard-earned money. Let us look at what makes PPF so popular while also taking a look at Equity Linked Savings Scheme (ELSS).[EasyDNNnews:PaidContentStart]
It is not for any small reason that Public Provident Fund (PPF) has gained so much appreciation amongst investors. Compared to many of the other tax-saving investment options, PPF is considered a topper in terms of both, safety and returns. Here are some of the advantages in its favour:
Triple Exemption Status
PPF enjoys the benefit of triple tax exemptions i.e. the exemptexempt-exempt (EEE) status. This means that you get tax exemption at the time of investment, accrual and withdrawal. One can avail deduction of up to `1.5 lakhs on investment made in each financial year under Section 80C of the Income Tax Act, 1961. Moreover, the interest earned on the investment is also exempt from taxation. Even the accumulated corpus which you withdraw on maturity is tax-exempt, thus making it a totally tax-free income.
Respectable Post-Tax Rate of Return
PPF, unlike Employees Provident Fund (EPF), is open to those not eligible for EPF. The interest rate on PPF as on March 2022 was 7.1 per cent, which is higher than other small savings schemes like the National Savings Certificate (NSC) that offers 6.8 per cent or the India Post Office’s five-year time deposit that offers 6.7 per cent. Moreover, the other saving schemes don’t offer EEE status and hence their interest rates are pre-tax
Beneficial Floating Rates
If one opts for fixed deposit for five years it tends to lock in the money at a fixed rate. On the other hand, even though in a PPF the money is locked in for a longer period, the interest rate is fixed by the government on a quarterly basis throughout the fiscal year. But floating rates can be tricky as they may be very fruitful if the rates go up but in a declining rate scenario the investor does not benefit in the long term. Hence, sometimes fixed rate in a long-term tax-saving instrument could give better gains to an investor. If you lock in your investment at a lower interest rate for a longer period, you will lose out when rates go up. In this case PPF is advantageous compared to a five-year tax-saving bank FD.
Tax Haven for Conservative Investors
PPF is one of the best options if you are a conservative investor looking for tax-saving with reasonable return and safety of your investment. At present, large banks are offering interest rate of around 5.5 per cent on their five-year tax-saving fixed deposits. The Deposit Insurance and Credit Guarantee Corporation provides insurance up to a limit of `5 lakhs on your fixed deposits, including the principal amount and the interest earned on the same. After that the interest earned on the sum is taxable. Although Sukanya Samriddhi Yojana and Senior Citizen Savings Scheme (SCSS) offer better interest rates than PPF, they are intended for specific objectives and are only available to a certain group of investors.
Risk-loving investors can keep some part of their portfolio in debt products to diversify their portfolio. Also, for a long-term investment goal such as retirement, PPF can prove to be a better option for aggressive investors as it not only gives the desired stability but also provides tax-efficient returns.
PPF offers fixed returns in the form of interest every year. The interest rate on PPF is fixed by the government on a quarterly basis and this does not vary much over the year. The average returns on PPF for the last five years have been around 7 per cent.
Investment and Withdrawal
PPF has a minimum investment of `500 and a maximum investment of `1.5 lakhs. You can make deposits in the PPF account up to 12 times in a year. Premature closure is only allowed on limited grounds such as serious ailments. Partial withdrawals are allowed after the expiry of seven years since the date of opening the account.
Equity Linked Savings Scheme (ELSS)
An ELSS fund is an equity-oriented fund where it is mandated to invest minimum 65 per cent of the assets in equity-linked securities. ELSS is the only type of mutual fund that allows tax deductions under the provisions of Section 80C of the Income Tax Act, 1961.
Features of ELSS
■ Tax Benefits under Section 80C:ELSS is the only kind of mutual fund that allows investments up to `1.5 lakhs a year for tax deduction benefits under Section 80C of the Income Tax Act, 1961. One can potentially avail tax benefits of up to `46,800 by investing in ELSS. The returns on ELSS are taxable at 10 per cent if the gains on investment exceed `1 lakh in the year
■ Higher Returns: ELSS has delivered exceptional returns in the past in the tax-saving category. Looking at the historical returns, ELSS schemes have generated about 14 per cent and 18 per cent in the past three years and five years, respectively. However, the returns on ELSS are linked to market performance and hence they can’t be totally guaranteed.
■ Lowest Lock-In: ELSS investment comes with a lock-in of only three years in the tax-saving category, making ELSS investments a relatively more liquid option. You can actually redeem your ELSS fund investment in just three years.
■SIP Option: You can start investing in ELSS with an amount as low as `500 per month through the systematic investment plan (SIP). You can begin or pause or stop the SIP whenever it is convenient. SIP does provide a lot of flexibility as well as convenience while making small but regular investments.
■ Rupee Cost Averaging: This is the process of averaging the price at which you acquire mutual fund units. For instance, when the markets fall you can get more MF units at a cheaper price and accumulate more for the price that you pay in every SIP instalment. An investor might be able to handle market volatility to some extent via the SIP route. Rupee cost averaging works out best when the markets are in a slump, but is very useful even when the markets are in a bull run.
To conclude, investing in PPF or ELSS funds depends upon an investor’s tenure of investment, his or her age at the time of investment and the risk appetite to invest in these two investment products. One can even consider allocating 50 per cent each to ELSS and PPF as this would help to have a well-balanced tax-saving portfolio.