Income Tax

Public Provident Fund is safest tax-saving instrument: But is PPF the best investment avenue?

Apart from the exemptions on investments u/s 80C, tax exemptions on interest and maturity make PPF ( Public Provident Fund ) a preferred tax-saving instrument of the exempt, exempt, exempt (EEE) category.

The Public Provident Fund (PPF) is one of the most popular tax-saving investment options because of attractive rate of interest, safety features like government guarantee and immunity against attachment under any order or decree of any court, as well as benefits like tax-free interest and maturity. So, apart from the tax exemptions on investments u/s 80C of the Income Tax Act, the tax exemptions on interest and maturity make PPF a preferred tax-saving instrument of the exempt, exempt, exempt (EEE) category.

Moreover, a majority of Indians are risk-averse investors and prefer PPF, because the capital invested not only bears no market risks, but is also fully secured with government guarantee. Not only these, but the balance in a PPF account can’t be attached even if a court orders to recover any debt or liability incurred by the account holder, which makes it the safest investment avenue.

However, PPF bears interest rate risk, as the rate of interest is not fixed for the entire investment period and the government revises the rate every quarter. So, along with the rate of inflation and RBI policy rates, rate of interest on PPF also fluctuates.

The tenure of PPF is investment is 15 years, which is too long for fixed-return investments and such a long investment period is more suitable for equity investments to fetch higher benefits. As equity investments are risky in short run, debt investments are more suitable for short period, but with market risks waning out in the long run, equity investments produce better returns.

As a result, during a long-term investment period of 15 years, Equity-Linked Savings Schemes would not only become less risky, but would produce much superior gains in comparison to PPF.

In fact in the last 15 years, the average rate of interest on PPF was 8.18 per cent, while the extended internal rate of return (XIRR) of top 6 ELSS funds was 17 per cent. So, Rs 1.5 lakh invested in lump sum at the beginning of each year for the last 15 years would amount to total investment Rs 22,50,000 and the return under PPF @ 8.18 per cent would be over Rs 44.68 lakh, while the return under ELSS @ 17 per cent would be Rs 98.75 lakh, which is more than double than the return on PPF.

So, despite the excellent safety features, in the long run, PPF is not the best investment in terms of the prospect of generating superior return.

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