PPF investment – it is still the best

The one scary aspect of the budget this time was the rumors that PPF withdrawals may be taxed. Fortunately these rumors turned out to be untrue, but I have had several questions from people asking if I have changed my opinion on PPF being the best investment in the debt space. After giving due consideration to all aspects, my opinion is that PPF remains the best instrument in the debt space, only bettered by SSY for people who have a girl child below the age of 10. As i have written several posts on PPF earlier, I am not going to explain the features and benefits of PPF here – do read those posts if you are interested.

Let me start by the fundamental issue first. Even though PPF has been spared this time, is it likely that it may be taxed in the future? I think the answer to this question is YES. Even though it is going to be a politically difficult decision to tax PPF withdrawals, it is likely that at some point in time the government will have to do it. This has been a suggestion made long back by the Kelkar committee and I think the EET treatment will be finalized in some years to come, maybe sooner than later.

Why then do I say that it is still the best instrument? Well, my reasons are as follows:-

  • Whenever the PPF withdrawal becomes a tax liability, it will always be with prospective effect. For example, if it were to become taxable from the next FY then your accumulated amount in PPF account could still be withdrawn without any tax impact. So, there is absolutely no need to close your PPF accounts thinking that you may need to pay taxes on your current corpus.
  • As was explained in the case of PF, even when PPF withdrawal is taxable, you will  be having tax liability on 60 % of the interest. The principal amount as well as 40% of the interest continues to be tax exempt.
  • The flexibility associated with PPF means you can stop your contribution at any time and also withdraw in a phased manner. When you are not having active income your PPF withdrawal can be phased, so as to ensure you minimize your tax impact.

Based on the above, I do not see any need to change the PPF strategy that I had advocated earlier. In fact, this is how I plan to use PPF for my own purpose:-

  • Continue investing 1.5 lacs every year for both myself and my wife. This will either come from some active income through consultancy or from FMP redemption.
  • I do not see a need for any withdrawals now, but may start to do so after another 5 years, for my discretionary expenditure.
  • In my case, I will stop the contribution or reduce it when the interest on fresh contribution becomes taxable to the extent of 60%. However, this is purely due to my stage in life. Anyone below 45 or so, should logically keep contributing.

That in essence is what most of the readers should do also. There is no real need to be in a tizzy due to the confusion in the budget. PPF remains the best investment of it’s kind, continue to invest in it with confidence.

Advertisements

11 thoughts on “PPF investment – it is still the best

  1. Sir one very basic and silly doubt – If one has EPF from company , does the contribution of EPF+PPF have to be limited to 1.5 Lakh? For eg say for argument sake, my EPF contribution is 50k, company also contributes equal amount (50k). Does this restrict me to invest only 50k in PPF so as to not cross the 80C limit ? Can I invest 1.5L in ppf ? Here I understand that tax benefit will be only for 1.5L invested by me. My intent is to use the good interest rate and EEE nature of PPF as debt part of my investment portfolio

    Like

  2. Hello Mr. Roy,

    I am a great fan of your blog and topics being covered here. It has reformed my thinking towards financial market in so may ways. Thanks for that.

    Till now (since 3 years) I was also investing in PPF for myself as well as my wife to the fullest with 1.5L limit but after recent Interest rate cut I am thinking of reducing my contribution into PPF and go towards NPS and continue with my wife’s PPF account solely. As NOS offers 50k tax benefit in addition to option of choice between equity (50%) & Debt(50%).

    Could you please share your views on the same.

    Like

    • If you are having PF then one PPF account may be enough. Otherwise keep both. NPS is also a good idea and you can add it if you want. However, do not do it mainly for tax reasons. While you get some benefit today the taxation at withdrawal is a bad rule currently in NPS. So from that angle investing in PPF and equity MF is a much better combination.

      Like

  3. Hi Sir,

    I have one basic doubt. you told that your investing 1.5 lacs every year for both myself and my wife. Can someone invest more than 1.5 lakhs in PPF in case wife has no income.

    Thanks,
    Debendra

    Like

      • Thank you sir. further doubts,
        1> While filling IT return interest earn from wife’s PPF account which is tax free should be declared in husband’s IT return or wife can fill her IT return even though she has nothing to pay income tax as she does not have income.

        2> Also, later point if taxman queries her income from PPF accounts, what proof is required to clarify. I heard better to have gift deed while transferring money to her saving account which she puts in her PPF account.

        Kindly clarify. I have doubts on these from long time but not getting clear answers.

        Like

      • You cannot gift to your wife directly as your incomes can be clubbed. It is better for you to gift to your parents etc and they can in turn gift to your wife.
        This way there will be no need to show her income in your account etc. Also as her income will be less than taxable amount she does not need to pay taxes.
        Gift deeds and all are not required but just maintain a record of the bank transfer you are doing to your parents.

        Like

  4. Glad to read your post. I’ve been a great fan of Mutual Funds for many years. But I have never ignored the debt component. Have always put maximum amount in PPF. (Earlier it was 1L and layer 1.5L) and now I’m also adding 1.5L in SSY for my daughter

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s