Skip to main content

Disadvantages of PPF


Available through the India Post network as well as leading banks, the Public Provident Fund is the preferred retirement vehicle for the non-salaried and the self-employed.


The scheme
Just like the NPS, the PPF also offers a flexible structure where you can make either monthly or lump-sum investments every year. The investments can range anywhere between R500 and R1.5 lakh a year, which is the maximum ceiling on investments. The PPF's maturity period is 15 years, but this is extendable in blocks of five years as the scheme matures. Early withdrawals from the account are allowed every year from the seventh year onwards. This makes the scheme more liquid than both the EPF and the NPS. The money collected in the PPF is used to fund the borrowing programmes of both the central government and the states. Interest rates on the scheme have been made market-linked from 2012, and are now subject to a formula based on the prevailing G-sec yields.


Returns
The PPF is in the process of making a transition from a 'fixed-return' small savings scheme to one whose rates will 'float' up and down with market interest rates. The interest that you will earn on your PPF account for each financial period is announced by the central government in advance. This rate applies not only to your contributions for the year but also to all the outstanding balances that you may have parked under the PPF account. In 2015-16, the PPF offered an interest rate of 8.7 per cent to its subscribers. From April 1, 2016, these rates have been slashed to 8.1 per cent.


The incomplete solution


Taxation
The PPF is still in the EEE regime. Your contributions to it are exempt from tax under Section 80C (provided you have room under this section) to the full extent of R1.5 lakh. The interest earned is exempt from tax and so are final withdrawals.


What's changed
With the government keen that interest rates on small-savings schemes should be 'market-linked' and not out of sync with bank deposit rates, it has announced significant changes to the interest calculations in March 2016. The interest rate on the PPF will now be reset every quarter and fixed at a 0.25 per cent spread over benchmark G-sec yields. G-sec yields for this purpose will be the average yields announced by FIMMDA for the preceding three months. While this will ensure that you will get higher rates if interest rates in the economy move up, you should certainly brace for greater volatility in the PPF rates from here on.


Apart from the changes in rate-setting, premature closure of the PPF account has been allowed too (before the maturity of 15 years). Subscribers have been allowed to close the account to meet specified emergencies (such as critical illness or higher education of children) with a 1 per cent penalty on the interest payout. However, such a premature closure is only allowed for investors who have completed five years.


The incomplete solution


If it is a safe investment you are looking for, then the 8.1 per cent tax-free interest on the PPF is hard to beat, even after the recent pruning. The early closure rule has also made the PPF far more liquid than either the EPF or the NPS. PPF remains a good bet on the taxation front, with the EEE regime intact. Unlike the NPS, your final withdrawals from it are not subject to any conditions such as purchase of annuities.


However, the PPF suffers from three key disadvantages in its current form. One, even if interest rates in the economy were to go up (and that is unlikely over the really long term), its returns are likely to be lower than instruments such as the NPS. The PPF invests in the safest instrument of all - government securities - and the safest instruments are also bound to offer the lowest rates at any given point in time. Therefore, even if you are a risk-averse investor who wants to avoid equities, the corporate bond and G-sec options of the NPS may offer a far better risk-adjusted return than the PPF.


Two, the quarterly 'floating-rate' structure brought in now will make it impossible for you to plan towards a specific retirement corpus using the PPF. Despite it being a long-term retirement vehicle, floating rates will not allow you to reap the benefits of buy-and-hold investing.


Three, the annual investment cap of R1.5 lakh on the PPF means that you cannot step up your retirement savings as your income rises. If you depend on the PPF alone, it may leave you with an inadequate corpus at retirement.




Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds

Top 10 Tax Saver Mutual Funds for 2017 - 2018

Best 10 ELSS Mutual Funds to invest in India for 2017

1. DSP BlackRock Tax Saver Fund

2. Invesco India Tax Plan

3. Tata India Tax Savings Fund

4. ICICI Prudential Long Term Equity Fund

5. Birla Sun Life Tax Relief 96

6. Franklin India TaxShield 

7. Reliance Tax Saver (ELSS) Fund

8. BNP Paribas Long Term Equity Fund

9. Axis Tax Saver Fund

10. Birla Sun Life Tax Plan



Invest in Best Performing 2017 Tax Saver Mutual Funds Online

Invest Best Tax Saver Mutual Funds Online

Download Top Tax Saver Mutual Funds Application Forms


For further information contact SaveTaxGetRich on 94 8300 8300


OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

OR

Call us on 94 8300 8300

Popular posts from this blog

Birla SunLife Manufacturing Equity Fund

The Make in India program was launched by Prime Minister Naredra Modi in September 2014 as part of a wider set of nation-building initiatives. It was devised to transform India into a global design and manufacturing hub. The primary motive of the campaign is to encourage multinational as well domestic companies to manufacture their products in India. This would create more job opportunities, bring high-quality standards and attract capital along with technological investment to bring more foreign direct investment (FDI) in the country.   Why India as the next manufacturing destination?   The rising demand in India along with the multinational's desire to diversify their production to include low-cost plants in countries other than China, can help India's manufacturing sector to grow and create millions of jobs. In the words of our Honourable Prime Minister- Mr. Narendra Modi, India offers the 3 'Ds' for business to thrive— democracy,...
Read more

Total Returns Index brings out real Equity Funds Performers

From February, equity mutual funds have to change their benchmarks to account for dividend payments. Until now, funds used price-based benchmarks alone. TRI or total return indices assume that dividend payouts are reinvested back into the index. What this does is lift the overall index returns, because dividends get compounded. For example, the Sensex TRI index will consider dividend payouts of its constituent companies while the Nifty50 TRI index will consider dividends of its constituents. Using TRI indices as benchmarks comes on the argument that an equity funds earn dividends on the stocks in its portfolio, which they use to buy more stocks. Therefore, using an index that also considers dividend reinvestment would be a more appropriate benchmark. Shrinking outperformance With a stiffer benchmark, it is obvious that the margin by which an equity fund outperforms the benchmark would shrink. Rolling one-year returns from 2013 onwards, the average margin by which largecap funds out...
Read more

Stock Review: Havells

HAVELLS India's stock performance has been muted in the past three months, in line with the weak broader market. But, given the turnaround in its overseas subsidiary and the launch of new products in its consumer durable business, the company's stock may undergo a re-rating.    Havells is India's leading consumer electrical goods company, with consolidated sales of . 5,527 crore in the past four quarters. Its wholly-owned subsidiary Sylvania, which makes lighting and fixtures, has established brands in European, Latin American and Asian markets. Sylvania repre sented nearly half of the company's consolidated revenues in the first half of FY11.    Sylvania's poor financials hit Havells' consolidated performance in FY10. But, this has changed in the cur rent fiscal. Havells has reduced fixed costs of Sylvania by exiting from unprofitable businesses and outsourcing manufacturing to low-cost locations such as India and China. In the September 2010 quarter, Sylv...
Read more

Kisan Vikas Patra - KVP

  Kisan Vikas Patra (KVP) First launched in 1988, the Kisan Vikas Patra (KVP) is one of the premier and popular saving scheme offering from the Indian Postal Department. This product has had a very chequered history- initially successful, deemed a product that could be misused and thus terminated in 2011, followed by a triumphant return to prominence and popular consumption in 2014. The salient features of KVP are as follows- The grand USP- Money invested by the applicant doubles in 100 months (8 years, 4 months). KVPs are available in the following denominations- Rs.1000, Rs.5000, Rs.10,000 and Rs.50,000. The minimum purchase value for the KVP is Rs.1000. There is no maximum limit. KVPs are available at all departmental post offices across India. These certificates can be prematurely encashed after 2 ½ years from the point of issue. KVPs can be transferred from one individual to another and from one post office to another. ----------------------------------------------------- Inve...
Read more

Mutual Fund Review: Reliance Regular Savings Equity

    Despite high churn, Reliance Regular Savings Equity has managed to fetch good returns   In its short history, this one has made its mark. Though its annual and trailing returns are amazing, the fund started off on a lousy note (last two quarters of 2005). It managed to impress in 2006 and was turning out to be pretty average in 2007, till Omprakash Kuckian took over in November 2007 and wasted no time in changing the complexion of the portfolio. Exposure to Construction shot up to 28 per cent with almost 21 per cent cornered by Pratibha Industries and Madhucon Projects . Exposure to Engineering was yanked up (18.50%) while Financial Services lost its prime slot (dropped to 6.69%) and Auto was dumped. That quarter (December 2007), he delivered 54.66 per cent (category average: 25.70%).   When the market collapsed in 2008, thankfully the fund did not plummet abysmally. But even its high cash allocations could not cushion the fall which hovered around the category average. ...
Read more
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now