Why investors love PPF as a tax saving investment

Although the Employees’ Provident Fund (EPF) currently offers the highest interest rate, PPF interest rate doesn't fall too far behind. EPF is offering 8.5% as of now. However, only salaried individuals can avail of this investment option. PPF, on the other hand, is a product in which even self-employed people can invest. The current interest rate on PPF is 7.1%, which is higher than that offered on other small savings schemes like the National Savings Certificate, Post Office 5-year Time Deposit and more.

Also read: Post office deposit schemes interest rates

Linkage to a floating rate is among the many reasons why PPF scores over products like the 5-year tax-saving bank FD. Unlike fixed deposits, where the interest rate is fixed for the entire investment period, the interest rate of PPF is floating which can change every quarter. Once the overall interest rate in the economy starts increasing, the interest rate on PPF will also rise in tandem and your investment will start fetching higher returns.

If you have enough time before you reach your goals or are young, the power of compounding can work wonders for your investment. A PPF account matures in 15 years. After maturity, you can either withdraw the entire balance and close the account or extend it for five years with or without making further contributions. Even this extension in blocks of five years can be carried out indefinitely.

Also read: 10 important things investors should know about PPF

If you are a conservative investor looking to lower your tax outgo along with assured returns and safety of investment, then PPF is one of the best options. At present, almost all banks are offering interest rates on their 5-year tax saving FDs that are lower than that offered by PPF. Although small savings schemes such as the Sukanya Samriddhi Yojana (SSY) and Senior Citizen Savings Scheme (SCSS) offer higher interest rates, these have designated purposes due to which only a select set of investors can invest in them.

Investor with high risk appetites can also keep a part of their investments in debt products to diversify their investment portfolios. If the investment is for a long-term goal, then PPF is a great option because it gives the desired stability and optimum returns in the debt portion of the portfolio. It can thus help cushion adverse impact of the equity portion in the long term.

Also read: VPF interest rate exceeds that of PPF: Both options compared

For most taxpayers in the highest income tax bracket, section 80C benefit may not be relevant because they have other avenues to utilise such as EPF, children’s education fee, home loan principal, term insurance premium etc. However, the tax exempted nature of returns makes PPF a very attractive choice, especially when income is subjected to tax at the rate of 30% or more. With PFF, one can build an entirely tax-free corpus.